Andrew Bary

Berkshire Hathaway's move to give up two board seats at Kraft Heinz could signal that Berkshire will start selling some of its big stake in the big food company this year.

Berkshire Hathaway now holds 325.6 million shares of Kraft, which said late Tuesday that it's evaluating "potential strategic transactions to unlock shareholder value." Berkshire Hathaway holds a 27% stake in Kraft, which is now worth about $8.7 billion.

The Kraft investment hasn't been a good one for Berkshire Hathaway and CEO Warren Buffett. Berkshire Hathaway participated in the buyout of Heinz in 2013 along with 3G Capital, and then rolled that equity interest into Kraft when those two companies merged in 2015. Berkshire also made an additional investment in Kraft at that time. Kraft stock is down about 65% since the deal to $26.

Buffett said in his 2015 annual letter that Berkshire Hathaway's cost basis in Kraft Heinz was around $9.8 billion, which suggests the company is in the red on the investment.

Kraft also said Tuesday that two Berkshire Hathaway directors on the 12-member board -- Alicia Knapp and Tim Kenesey -- have stepped down, which Kraft said is keeping with Berkshire Hathaway's policy of not holding board seats on "non-controlled investments."

"While there is nothing in [the] press release about what Berkshire plans to do with its 27% stake in the company, our guess is that they will start selling this year, thus creating an overhang on the stock," wrote Robert Moskow, a food analyst at TD Securities, in a client note.

It's easier for an investor to reduce a large stake when none of its representatives are on the company's board because of restrictions on the timing of any stock sales. It's also conceivable -- but unlikely -- that Berkshire Hathaway might seek to buy all of Kraft given the depressed stock price.

Barron's reached out to Berkshire Hathaway for comment and hasn't received a response yet.

The prospect of potential selling by Berkshire may have contributed to the drop in Kraft stock Wednesday, which was down 4.6% to $26.63 after hitting a new 52-week low. The stock is off another 0.7% Thursday to $26.44.

Stocks often rally on news of potential strategic transactions, so the drop in Kraft's stock was mildly surprising -- and could reflect concerns about potential sales by Berkshire Hathaway.

Kraft stock trades cheaply -- as do many packaged-foods stocks. The shares fetch just 10 times projected 2025 earnings, and the dividend yield of 6% is well covered by earnings.

Berkshire Hathaway hasn't changed its holding in Kraft stock since the 2015 merger, while 3G has gotten out of its large stake in the company. At the time of the 2015 merger, Kraft was a hot stock and 3G's managers, who took over the company's management, were viewed as some of the best in consumer products with a focus on cutting costs.

Buffett has said little about Kraft in recent years. He was asked about the company roughly six years ago in a CNBC interview, and he said Berkshire Hathaway wasn't adding to the stake because it saw better opportunities elsewhere in the stock market.

Over the past decade, Kraft shares have been depressed by several factors: sluggish sales, a need to cut debt, a dividend cut in 2018, and investor distaste for slow-growth packaged-food companies.

Berkshire Hathaway is carrying its Kraft stake on the books for $13.5 billion, considerably above its market value. This reflects quirky accounting rules. Berkshire Hathaway's stake in Kraft exceeds 20%, requiring a different accounting treatment than sub-20% equity holdings, which are carried at market.

Given the high carrying relative to market value, there is a risk that Berkshire Hathaway may need to write down the investment.

Berkshire Hathaway, however, said in its first-quarter 10-Q that no write-down was needed.

The 10-Q states that Berkshire Hathaway "considered our ability and intent to hold the investment until the fair value exceeds carrying value, the magnitude and duration of the decline in fair value, the operating results and financial condition of the company, as well as other factors. Based on the prevailing facts and circumstances, we concluded the recognition of an impairment charge in earnings was not required as of March 31, 2025."

The wording suggests that Berkshire may keep the Kraft Heinz equity stake since it sees fair value ultimately exceeding the carrying value.

Kraft is viewed by some as having a dated food portfolio of average to below-average quality by current industry standards, with more exposure to private label competition than some peers.

It makes Kraft Macaroni and Cheese, Oscar Mayer, Philadelphia Brand cream cheese, Lunchables, Velveeta, Kool-Aid, Heinz ketchup and sauces and A1 steak sauce.

The environment has gotten worse for the industry since the naming of Robert F. Kennedy Jr. as head of Health and Human Services, given his antipathy toward packaged foods.

The two Berkshire Hathaway board members who stepped down aren't familiar to most investors. Knapp heads the big renewable-power business inside the Berkshire Hathaway Energy unit, while Kenesey leads MedPro, a healthcare liability insurer owned by Berkshire Hathaway.

Berkshire Hathaway executive and investment manager Todd Combs, who heads the company's Geico unit, is a board member of JPMorgan Chase, but Berkshire Hathaway doesn't have an investment in the company.

Kraft stock was around $80 at the time of the 2015 merger. Since the deal, the S&P 500 has nearly tripled, highlighting the opportunity cost to Berkshire Hathaway of that investment.

If Berkshire Hathaway does sell any Kraft stock, the transaction likely will be reported within two business days as a regulatory requirement, since Berkshire Hathaway's stake exceeds 10%.

Berkshire Hathaway doesn't need the cash from any potential sales of Kraft stock, given that Buffett's firm holds over $330 billion of cash and equivalents, but Buffett could throw in the towel in what has been a disappointing investment.

Write to Andrew Bary at andrew.bary@barrons.com

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May 22, 2025 12:26 ET (16:26 GMT)

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