Warren Buffett's Berkshire Hathaway Crafts Deals for Kraft Foods and GlaxoSmithKline

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Warren Buffett's Berkshire Hathaway Inc. (BRK.A, BRK.B) has taken an 8.6% stake in Kraft Foods Inc. (KFT), making it the foodmaker's biggest shareholder.

In a regulatory filing made late last week, the Omaha-based Berkshire also revealed that it had acquired a $76.1 million stake in GlaxoSmithKline PLC (GSK), Europe's largest drugmaker.

That followed investments in several health-care companies over the last year, including drugmakers Johnson & Johnson (JNJ) and Sanofi-Aventis SA (SNY), as well as health insurers UnitedHealth Group Inc. (UNH) and WellPoint Inc. (WLP), the Reuters news service reported.

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In its filing with the U.S. Securities and Exchange Commission, Berkshire said it owned 132.4 million shares of Kraft as of Dec. 31, worth $4.32 billion at the time. That implies that the market price of the Kraft shares at that time was $32.63 [$4.32 billion/132.4 million shares = market price at the time of $32.63].

However, Berkshire said that it had accumulated more than half of that stake by June 30, but it didn't disclose the investment until now. Securities regulators have often allowed Berkshire to delay the disclosure of its investment purchases so that Buffett can be certain that he's done adding to his initial positions in a given stock.

The Berkshire stake in Kraft is more than double the size of the holding attributed to State Street Global Advisors (STT), the next-largest shareholder, according to Thomson ShareWatch.

Kraft, based in Northfield, Ill., is just the kind of brand-oriented company that Buffet likes to buy: It has a pantry of well-known products - including Oreo cookies, a reputed Buffett favorite - and the stock is out of favor. The company's product array includes Maxwell House coffee, Oscar Mayer deli hot dogs and deli meats and Kraft-brand cheeses.

"This is a company with leading, high-quality brands with depressed margins," Matt Arnold, an analyst at Edward D. Jones & Co., told Reuters. Kraft Foods "offers significant value if management can restore profitability and drive the top line with product innovation."

China's Dairy Demand Stings Kraft, Dean Foods and Others

Rising dairy prices have hammered Kraft, as they have such firms as Dean Foods Co. (DF), the biggest U.S. dairy producer. On Jan. 30, Kraft posted a 6% decline in fourth-quarter profits after a jump in dairy costs that exceeded 40% neutralized an 11% increase in revenue.

Escalating dairy prices are especially hurtful to a company such as Kraft, which gets about 20% of its revenue from its cheese products. Growing demand for dairy products in China is a big part of the reason dairy prices have soared.

Kraft is a spin-off from Altria Group Inc. (MO), which went public in June 2001 at $31 a share. Kraft shares gained $2.02 [a 6.89% increase] to close Friday at $31.33.
Berkshire owns big stakes in such other big consumer-products as Coca-Cola Co. (KO) and Procter & Gamble Co. (PG).
Buffett is now worth $52 billion according to Forbes magazine.

Since taking over Berkshire Hathaway in 1965, he has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies. Berkshire has a market value of nearly $220 billion.

The Moves of a Master: Recent Deals by Warren Buffett's Berkshire Hathaway

  • Set up Berkshire Hathaway Assurance Corp. in December to enter the bond insurance market, since it's currently straining under its connections to sub-prime loans. Bought 3% stake in Swiss Re (OTC: SWCEY), world's largest reinsurer, which had lost a quarter of its value since taking a $900 million write-down in November. Also takes 20% stake in Swiss Re's property/casualty reinsurance business.
  • Spent $4.5 billion for 60% stake in privately held Marmon Holdings Inc., maker of such products as railroad cars, metal fasteners and pipes for plumbing.
  • Spent $4 billion for 80% of ISCAR, an Israel-based cutting-tool business that operates in 61 countries globally.
  • Made major moves on U.S. railroad carriers last year, making first move on Burlington Northern Santa Fe Corp. (BNI) last April. Berkshire bought nearly 40 million shares - or close to 11% - of the railroad. Berkshire also snapped up 10.5 million shares of Union Pacific Corp. (UNP), and 6.4 million shares of Norfolk Southern Corp. (NSC). Berkshire added 3.3 million shares of Burlington at $80 each in August, 6,000 more in September, and 10,200 more in January - which means Buffett now owns more than 18% of the freight specialist.
  • In a highly publicized move in the past few months, Berkshire received a license to start its own bond-insurance company in New York. It also agreed to pay $440 million to buy a reinsurance unit from ING Groep NV (ING), the biggest Dutch financial-services company.
  • In late October, Buffett paid his first visit to South Korea. Berkshire has invested in 20 companies, including a 4% stake in No. 1 Korean steelmaker POSCO Ltd. (PKX).
  • During that same period, reports revealed that Buffett had pared his China investments, believing that market was overvalued.

Sources: Money Morning, Google Finance, The Financial Post.


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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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