Berkshire Hathaway signals potential exit from Kraft Heinz

Berkshire Hathaway moved closer to abandoning one of its most troubled investments on Tuesday when the food company Kraft Heinz disclosed that the conglomerate may sell almost all of its shares. The filing with the Securities and Exchange Commission revealed that Berkshire could offload up to 325 million shares, representing roughly 27% of Kraft Heinz and a stake currently worth around $7.7 billion. The news sent Kraft Heinz stock tumbling nearly 5% in after-hours trading.

The potential sale marks a dramatic reversal for an investment that Warren Buffett championed over a decade ago. Buffett personally orchestrated the 2015 merger between Kraft Foods and H.J. Heinz alongside the Brazilian private equity firm 3G Capital, betting that combining two iconic American food brands would create a powerhouse capable of driving profits through efficiency and scale. Instead, the deal has become a textbook example of how even the world's most successful investor can miscalculate.

Background

When Buffett and 3G Capital engineered the merger in 2015, the logic seemed sound. Both companies owned beloved brands with long histories. Kraft's portfolio included products like Heinz ketchup, Oscar Mayer hot dogs, and Philadelphia cream cheese. The strategy centered on cutting costs aggressively while leveraging the combined brand power to maintain pricing power with consumers and retailers.

Buffett was so confident in the deal that Berkshire invested heavily. The conglomerate became the company's largest shareholder, a position it has maintained for the past decade. Yet from the start, the combined company faced mounting challenges. The food industry was already shifting as consumers grew more health-conscious and price-sensitive. Private label brands gained shelf space at grocery stores, and newer competitors focused on organic, natural, and specialty products began capturing market share.

The company's response to these pressures made things worse. Management pursued relentless cost-cutting that starved the brands of investment in innovation and marketing. The strategy backfired. Sales slowed, and the company found itself trapped between premium competitors offering healthier options and discount brands offering better prices.

Key Details

Berkshire's potential exit comes after years of mounting losses on the investment. The conglomerate has already written down the value of its Kraft Heinz holdings twice. In 2019, Berkshire took a $3 billion impairment charge. Then in August of last year, it recorded an additional $3.76 billion charge, acknowledging that the investment had deteriorated further than previously recognized.

Buffett himself admitted the mistake publicly. He told investors that the deal rested on overly optimistic assumptions about how durable brand power would prove to be in a changing marketplace. The comment was striking coming from a man whose entire investment philosophy depends on identifying companies with lasting competitive advantages, or what he calls economic moats.

"We were too optimistic about the durability of these brands," Buffett essentially acknowledged when discussing the investment's poor performance.

The timing of Berkshire's potential exit is significant. Greg Abel took over as Berkshire's chief executive on January 1, succeeding the retired Buffett. This filing represents one of Abel's first major decisions at the helm. Industry analysts are watching closely to see whether a Kraft Heinz sale is an isolated decision or the beginning of a broader review of Berkshire's holdings.

The Breakup Factor

The Kraft Heinz situation has grown more complicated by the day. The company announced plans to split into two separate publicly traded companies later this year, unwinding the 2015 merger that Buffett championed. Both Buffett and Abel publicly opposed the breakup when it was announced, yet it is moving forward anyway. The new CEO at Kraft Heinz, Steve Cahillane, who started on January 1, is pushing the separation strategy.

The breakup adds uncertainty to the investment picture. Shareholders would receive stock in two different companies instead of one, and it remains unclear how the assets and liabilities will be divided. This uncertainty may be pushing Berkshire to simply exit rather than wait to see how the breakup unfolds.

3G Capital, Berkshire's original partner in the deal, already exited in 2023, leaving Berkshire as the dominant outside shareholder.

What This Means

If Berkshire completes a full sale of its Kraft Heinz stake, it would represent the end of one of the investment giant's most public failures. For a company built on Buffett's reputation for identifying quality businesses at reasonable prices, the Kraft Heinz debacle stands out as a major miscalculation.

The sale would also likely pressure Kraft Heinz's stock price in the near term. Berkshire's stake is so large that any sale would flood the market with shares. Investors may worry that if Berkshire, which helped create the company, is bailing out, there must be deeper problems ahead.

For the broader packaged food industry, the potential Berkshire exit shows challenges that have plagued the sector for years. Consumer preferences are shifting away from processed foods. Price increases that companies tried to pass along to consumers have faced resistance. Competition from private label and health-focused brands continues to intensify. These structural headwinds are not unique to Kraft Heinz, but the company has struggled more than many of its peers to adapt.

The filing does not confirm that a sale is imminent. Berkshire could hold the shares indefinitely. However, the fact that the company took the step of registering the shares for resale signals that management is seriously considering the move. For investors watching Berkshire's portfolio, it may be a sign that even the most patient investors have limits when it comes to waiting for a turnaround.