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starbucks4ever (98.77)

How Buffett blew his Kraft investment



June 10, 2010 – Comments (6)

Buffett's purchase of BNI was a mistake on many counts: he bought a useless railroad company with no future, he mistimed it, he overpaid for it. But it was also a mistake in terms of opportunity cost. Buffett had already owned his best investment opportunity, and missed his chance to complete the purchase for roughly the same amount of money that he instead misspent on BNI. 

The company name was Kraft Foods, the market cap was comparable to BNI, and the business was minting money like no railroad company ever will. Buffett already owned about 9%, and could buy the rest very cheaply because the stock (not the business) was blessed with an incompetent and power-hungry CEO determined to run the business into the ground if necessary in order to purchase a new shiny trinket (Cadbury). The CEO's expensive ambition depressed the stock price and it became very cheap. It was not cheap for retail investor Joe Sixpence because Joe would have no hope to get rid of the CEO. But it was cheap for Buffett who was already a major holder and only needed to boost his stake to 50% + 1 share to replace all the management and call off the value-destroying deal. 

To that end, Buffett would only need to purchase a little more than 40% of the company, and that assuming that he acted alone. In practice, he could easily buy a smaller stake if he aligned himself with some of the other major holders such as Capital Research or Morgan Stanley and convinced them that ousting the incompetent management was in everybody's interest. Realistically speaking, a 20% share of KFT and an alliance with other holders - who would all be eager to vote with Buffett if that's what it took to win a word of approval from the Snawball - would be sufficient. 

By letting his childhood obsession with trains move his focus away from the real prize, Buffett missed his chance to rescue his considerable investment in KFT, turn around an excellent business, and profit handsomely from that turnaround. He also missed his chance to boost his reputation by helping fire a corporate executive who was doing damage to her shareholders. And last but not least, Buffett could thus avoid overstretching his finances because quite frankly, purchasing BNI was a little more than he could chew. 

6 Comments – Post Your Own

#1) On June 10, 2010 at 11:42 PM, GenericInvestor (83.70) wrote:

I'm not sure if I would call BNI a "useless railroad with no future," because we use rail to ship enormous volumes of product in this country.

I like your option on Kraft, the purchase of Cadbury was pointless and they sold great assets such as the frozen pizza business to pay for it. I'll never buy Kraft or a company with a woman CEO.

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#2) On June 10, 2010 at 11:56 PM, starbucks4ever (98.77) wrote:

Actually, I think the average female would do a better job running a business like KFT than the average male. But this particular one deserves to lose her job. 

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#3) On June 11, 2010 at 8:56 AM, Melaschasm (64.71) wrote:

I doubt Buffet had the time needed to take control of Kraft and stop the Cadbury deal.  Even if Buffet only needed to add 20% to his current position in Kraft, such massive buying would have driven the stock price up, and taken away much of his profits.  Plus Kraft wasn't dirt cheap until after the Cadbury buy was announced, which left very little time to find a way to stop the purchase.

I suspect BNI's future depends upon many factors including a return to economic growth in the USA and new carbon taxes.  Who knows, Buffet may get a $100 billion check from the government to convert BNI to a high speed rail system in one of the next few emergency spending/stimulus bills.

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#4) On June 11, 2010 at 8:17 PM, walt373 (99.85) wrote:

BNSF was actually more profitable than Kraft, in terms of ROE and margins. BNSF also had very high FCF.

As for "useless with no future", I think the opposite is true. Railroads are the cheapest way to get goods around the country. They will be used for a very long time. If I had to bet which company would be around in 2100, I would take BNSF over Kraft. And when peak oil happens and oil prices go up, railroads will be needed more than ever.

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#5) On June 14, 2010 at 2:31 AM, blesto (31.60) wrote:

♪ I've ♫ been workin' on the ♪

Railroad ♪

All ♫ the live long daaaay! ♪

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#6) On June 14, 2010 at 9:37 PM, HarryCaraysGhost (99.15) wrote:


♪ I've ♫ been workin' on the ♪

Railroad ♪

All ♫ the live long daaaay! ♪

Cool was that how you did that.

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