Buffett’s Chess Move That the Market is Missing.
The concept of ‘agency’ between management (known as the agents) and shareholders (known as the principals) in finance is an important one, where shareholders delegate decision-making authority to management to run the company in their best interests. At Kraft Heinz (KHC) a public disagreement between management and the company’s largest shareholder, Berkshire Hathaway (27.5% stake in KHC), makes for a fascinating ‘agency’ dynamic. This disagreement spilled into the open on 2nd September 2025 after Kraft Heinz announced plans to split the company into two separate units. Buffett, via an interview with CNBC, swiftly expressed his disappointment at the announcement, and made some other carefully considered comments that are worth closer scrutiny.
Buffett’s public criticism of one of his investee companies is highly unusual. In my opinion his primary motivation was not simply to express his ‘disappointment’ but to explore the possibility of changing the current management of Kraft Heinz.
Plans for a Break-Up
This is an extract from the Kraft Heinz news release from 2nd September 2025:
Other key points from the announcement:
- The break-up will cost approximately US$300million.
- The transaction is expected to close in the second half of 2025.
- The entity that will include Oscar Mayer, Kraft Singles and Lunchables brands will be led by current CEO Carlos Abrams-Rivera.
- The Company has engaged a search firm to identity potential CEO’s for the other entity that will include Heinz, Philadelphia and Kraft Mac & Cheese brands.
You can read the full news release here.
From what I’ve read about Warren Buffett, he prefers company management to focus on running the business and to avoid unnecessary corporate finance activities. As an example, here’s a quote from Berkshire Hathaway’s 2010 Annual Investor letter:
“At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment.”
For Kraft Heinz to go through the enormous distraction of breaking up the company, rather than focus on the business of selling consumer staples AND to leave shareholders with a US$300million cost for doing so, was never likely to be music to Buffett’s ears.
The Public Rebuke
Now, lets take a look at how Warren Buffett reacted to Kraft Heinz‘s 2nd September 2025 announcement, as reported by CNBC:
Following a phone interview with Warren Buffett, journalist Rebecca Quick reports, “Well, if you’re wondering what Buffett and Berkshire are thinking about this, here’s the answer. In one word ‘Disappointed‘. Warren Buffett tells me that they were disappointed with them coming up with this idea, and then disappointed on top of that, that shareholders will not be getting a vote when it comes to what’s going to be happening with this. He says ‘We will proceed to do whatever we think is in the best interest of Berkshire‘.”
Rebecca Quick then goes on to report that Buffett stated:
“If we are approached about selling our shares, we wouldn’t accept the block bid unless the same offer is made to other Kraft Heinz shareholders.“
This last statement is worth considering. It’s been carefully crafted and it’s precise. It wards off bids for their 27.5% stake in isolation but hints that offers for the whole company might be favourably considered. The statement implies an all-or-nothing invite to bid for the whole company, without being explicit.
To my knowledge, Buffett hasn’t called for the removal of current management publicly but with the current disagreement on strategy, a successful bid from one of Kraft Heinz’s global competitors would be a way to derail plans to split up the company, while also attracting new management to run the business.
Depending on whether a bid was in cash or shares (or a combination), Buffett could either exit on the bid or perhaps accept shares in the acquiring company and continue as a shareholder under new management.
There are many combinations of how this might play out but Berkshire Hathaway selling their stake in the market, whilst a possibility, is not how I think this will proceed. After all, Kraft Heinz is highly cash-generative, pays a current dividend yield of approximately 6% and in my opinion, is significantly undervalued.
The 2015 Merger – ‘It Certainly Didn’t Prove to Be A Great Idea’
The backdrop to today’s situation is of course the 2015 merger between Kraft and Heinz led by 3G Capital and Berkshire Hathaway. The merger was projected to deliver $1.5 billion in annual cost synergies by 2017, driven by economies of scale, streamlined operations, and debt refinancing. Kraft Heinz adopted 3G Capital’s zero-based budgeting (ZBB) model after their merger, which required every department to justify all expenses from scratch annually instead of relying on previous budgets. KHC reported meeting or exceeding the $1.5 billion annual synergy target by 2017, primarily through the above measures but the success was short lived. Cost cutting was taking its toll on product innovation and employee morale at a time when consumer trends were changing and competitive pressures increasing.
SEC Subpoena
There were other challenges along the way too. In early 2019, the Company announced they had received an SEC subpoena in connection with accounting policies relating to its procurement function.
The CEO Bernardo Hees resigned in April, 2019, and was succeeded by Miguel Patricio in June 2019.
On 7th June 2019, Kraft Heinz announced they had filed their 10-Q report for FY 2018 with the SEC and that “The Annual Report includes restated audited consolidated financial statements as of December 30, 2017, and for the years ended December 30, 2017, and December 31, 2016, as well as restated unaudited interim financial statements for the quarterly periods ended September 29, 2018; June 30, 2018; March 31, 2018; September 30, 2017; July 1, 2017; and April 1, 2017.“
The FY 2018 report quantified the misstatements, saying “Our internal investigation and review identified adjustments that resulted in an understatement of cost of products sold totalling $208 million“
The restatements were described as follows: “The cumulative impact of the restatements to previously reported amounts from 2015 to 2018 is less than 1% of net income/(loss) for each applicable period.“
The SEC investigation was finally settled on 3rd September 2021 with the SEC announcing that “Without admitting or denying the SEC’s findings as to them, Kraft consented to cease and desist from future violations and pay a civil penalty of $62 million.“
While not financially material, it was an episode that Kraft Heinz shareholders could have done without.
Miguel Patricio stepped down as CEO on 31st December 2023, moving to the role of non-executive chair of the company’s board and making way for a new CEO.
Carlos Abrams-Rivera
The current CEO of Kraft Heinz is Carlos Abrams-Rivera, was appointed by the Board of Directors, effective January 1, 2024. He holds a Bachelor of Science degree in Economics from Carnegie Mellon University and has over 20 years of experience in the food and beverage sector. He started at Kraft Foods in 2000, working in sales and marketing roles. From 2013 to 2019, he held senior positions at Mondelez International, including Vice President of Sales for Latin America, managing snack and confectionery portfolios. He returned to Kraft Heinz in 2020 as U.S. Zone President, later becoming Executive Vice President and President of the North America Zone in 2021. His tenure overseeing North American operations preceded his appointment as CEO.
Cracks Started to Show – 20th May 2025 – Evaluating Strategic Transactions
If we go back to the news release of 20th May 2025, cracks were already beginning to form between the new CEO and Berkshire Hathaway.
At the same time as announcing the evaluation of ‘potential strategic transactions‘, two Berkshire Hathaway appointed board members, Timothy Kenesey and Alicia Knapp, stepped down from the board. The news release stated:
“Mr. Kenesey’s and Ms. Knapp’s decisions are not the result of any disagreement with management or the Board related to the Company’s operations, policies or practices.”
Agreements or disagreements on strategy, however, were not mentioned.
None-the-less, it now appears that CEO Carlos Abrams-Rivera has pushed ahead with plans, despite the concerns of his largest shareholder. In addition, if the CNBC report is it be believed, shareholders will not get a chance to vote on the proposed break-up.
Remember this concept of agency?
In light of this disagreement, it’s less surprising that Buffett is using his significant shareholding and his influence to push back on Abrams-Rivera’s plans. While Berkshire Hathaway don’t control Kraft Heinz they’re far from powerless.
The Open Market
Buffett has said “We will proceed to do whatever we think is in the best interest of Berkshire.”. As I mentioned earlier, I don’t believe Buffett will sell his 27.5% KHC stake in the open market. He has sold out of large holdings on-market before. For example, in 2013, Berkshire owned approximately 5% of Tesco plc. According to Buffett he “soured somewhat on the company’s then-management and sold 114 million shares“. This was a partial sale of the full stake. A year later, he exited completely.
Exiting a 27.5% stake is a different challenge entirely, at the same time it’s a far more significant stake than the Tesco scenario.
Kraft Heinz Financials
Let’s take a look at Kraft Heinz’s financials over the last few years. To start with revenue has stagnated from 2018 and 2024.
In their 1H 2025 earnings report announced 30 July 2025, KHC reiterated their FY 2025 forecast for Organic Net Sales -1.5 to -3.5 percent versus the prior year. (Organic Net Sales defined as net sales excluding, when they occur, the impact of currency, acquisitions and divestitures, and a 53rd week of shipments.) Revenue decline remains a problem.
In addition, significant Goodwill impairment and Intangible asset impairment losses (highlighted in yellow below) between 2018 and 2024 have led to volatile Net Income and Basic and Diluted Earnings Per Share (also highlighted in yellow) numbers.
2015 Merger – Intangible Assets & Goodwill
The 2015 Merger was accounted for under the acquisition method of accounting for business combinations and Heinz was considered to be the acquiring company. Heinz paid total consideration of US$52.6billion for Kraft. Identifiable intangible assets for Kraft were valued at US$49.7billion, of which US$45billion were indefinite lived assets (think brands). The excess of consideration over the ‘net assets acquired‘ creates goodwill. In this case, US$29billion of goodwill was created. Goodwill is an accounting concept that allows the Statement of Financial Position to balance. The logic behind why Heinz would pay significantly more than the identifiable net assets of Kraft was justified because management believed further value would be ‘achieved from the combined operations and planned growth in new markets‘ (see underlined in red below).
The resulting balance sheet at 3 January 2016 of the merged entity showed over US$100billion of intangible assets and goodwill.
Under US GAAP accounting rules, indefinite-lived intangible assets and goodwill are tested for impairment at least annually.
Impairments
In 2018, a total of US$15.9billion in impairment charges were realised. Five brands were written down – Kraft, Oscar Mayer, Philadelphia, Velveeta and ABC – leading to a total intangible asset impairment loss of US$8.9billion for the year and an additional US$7.0billion charge was taken to goodwill. Earnings turned to a significant loss that year.
Kraft Heinz stated that there was ‘no single determinative event or factor’ for the impairments but said that several factors were taken into consideration including;
- A decrease in the share price of KHC in November, December 2018 which reduced the companies market cap. below net assets.
- 4Q 2018 results that were below managements expectations due to supply chain costs and increased competition.
- Managements 2019 operating plan that expected lower growth and margins.
- Increased interest rates.
In the extract of historical operating cash flows shown below you can see in the highlighted middle row for ‘Goodwill and intangible asset impairment losses‘ there are impairments between 2018 and 2024 of US$28.1billion in total, starting with US$15.9billion of impairments in 2018. These impairments caused volatility in earnings. Notice how ‘Net income/(loss)‘ ranges from a loss of US$10.3billion in 2018 to a profit of US$2.8billion in 2023. Impairments, of course, are non-cash and despite these impairments, ‘Net cash flows provided by operating activities‘ ranged from US$2.469billion in 2022 to US$5.364billion in 2021, averaging US$3.8billion between 2018 and 2024.
These impairments, while impacting net income, are simply an indication that Heinz paid too much for Kraft and Buffett admits as much in 2018 in the following interview, which is worth watching:
Return on Tangible Assets
In the 2018 video above, At approximately 40 seconds in, Buffett mentions a metric that he uses to illustrate why he likes the Kraft Heinz business. This metric is return on tangible assets. As he points out, the company, back then (presumably he’s referring to 2017 FY numbers) was generating “US$6billion pretax but after depreciation not after amortisation but after depreciation on US$7billion of tangible assets. It’s a fabulous business.”
Let’s try and calculate the same metric based on FY 2024 earnings.
If we start with ‘Income/(loss) before income taxes’ of US$856million, then we need to add back the ‘goodwill and intangible asset impairments’ since neither of them relate to return on tangible assets. US$856million + US$1,638million + US$2,031million = US$4,525million. Then we need to dig into the cash flow statement to find the ‘depreciation and amortisation’ charge for the year which is US$948million. Note 7 of the financial statements shows that the depreciation charge in 2024 was US$696million allowing us to calculate the amortisation charge for the year as US$948million – US$696million = US$252million. If we add this to US$4,525million we get a pre-tax return on tangible assets of US$4,777million. The tangible assets in the balance for ‘property, plant and equipment’ for FY 2024 is US$7,152million, giving us a 67% pre-tax return on tangible assets.
This compares to US$6,000million on US$7,000million as highlighted by Buffett in 2018, (as per the video above), or an 86% pre-tax return on tangible assets.
There has clearly been a deterioration in the performance of the business. But I’d argue that the share price has more than compensated for this. At the beginning of 2018, Kraft Heinz’s share price was around US$80 per share but by the beginning of 2025 the share priced had dropped to approximately US$31 per share. A drop of over 60%. And this, despite the share count remaining more of less static over the period at approximately 1.2billion shares.
Dividends
As Buffett mentions in the video above, debt had risen to US$31billion by the end of December 2017 which was higher than “projections to ratings agencies and so on and we need to bring it down“. They lowered debt levels from US$31billion to approximately US$20billion today by cutting the dividend by a third to US$1.60 per share annually, which has been paid since 2019 and represents approximately a 6% dividend yield based on KHC’s current share price of US$26.42 (19th September 2025 close).
Dividend Coverage
To understand how well covered the dividend is it’s worth referring back to the Cash Flow Statements. Presented below is an extract from the lower half of KHC’s historic cash flow statements. Let’s focus on 2024: Net cash flows provided by operating activities generated US$4.032billion last year. This is after servicing debt with interest payments of US$907million (see the highlighted row at the bottom). To sustain the business going forward capital expenditure is required to maintain tangible assets i.e. Property, plant & equipment (factories might need new machines etc). This capital expenditure amounted to an outflow of US$1.024billion. The payment of dividends to shareholders required an outflow of US$1.931billion. The balance of cash generated from operations in 2024 was used for share buybacks. I haven’t highlighted this item but you can find an outflow of US$988million in financing activities.
If the share buybacks, which commenced in 2022, are considered discretionary, once capex is paid and dividend are paid, then there appears to be a cushion for dividend coverage.
Advertising
The annual capex payment of approximately US$1.0billion sustains tangible assets so the business can continue into the future. But what about intangible assets? If we search KHC’s 10-k we find the following note on p.61 that highlights annual advertising costs of approximately US$1.0billion and which is recorded as part of selling, general and administrative expenses (SG&A) in the income statement.
While Kraft Heinz brands have struggled, intangibles are far from ignored. Their operations make significant allocations to brand promotions and events, etc. year in year out.
Research & Development
None-the-less, competition has increased over the last few years and while KHC has been focusing on Zero-Based Budgeting and SEC investigations, perhaps the competition has been keeping an eye on the consumer and their changing tastes and preferences. The following shows the current level of R&D spend at KHC.
Which brings us back to Buffett’s recent disappointment at break-up plans. After all, these proposed plans by the new CEO will cost shareholders US$300million for corporate tinkering. If management spent an additional US$300million on R&D, tripling last years spend, then perhaps KHC would be better placed to compete in the fiercely competitive world of consumer staples. Perhaps a far better use of the money, let alone the corporate distraction for management who should be focusing on the consumer and how to compete not speaking with lawyers and investment bankers on break-up plans.
Valuation
We’ve highlighted that Kraft Heinz continues to be a strong business, as measured by Return On Tangible Assets, despite a level of deterioration from prior years. We’ve also looked at the strong cash generating ability of the business that allows it to reinvest in the business, while paying substantial dividends and buying back shares. But what is the company worth?
A Discounted Cash Flow (DCF) model will give us an estimate of intrinsic value which might be a useful guide. We use DCF modelling as a broad brushed valuation tool as forecasting future cash flows presents many challenges. But by estimating future Cash Flows to the Firm and discounting back at our calculated Weighted Average Cost of Capital (WACC) of 4.75% (WACC is low due to the lower cost of debt and KHC’s debt level of US$20bln) we estimate just over US$60 per share. The historical long-term earnings yield on the S&P 500 is approximately 5.5%, if we increase WACC to 6%, building in an extra cushion, we still estimate an intrinsic value of approximately US$40 per share for Kraft Heinz. Over 50% upside from current levels and all while also receiving US$1.60 per share annually in dividends. These forecasts also assume modest negative revenue growth in 2025 and 2026, flat revenue in 2027 and modest revenue growth in 2028 and 2029. Kraft Heinz appears undervalued.
Conclusion
The merger between Heinz and Kraft was, in the words of Buffett ‘not a great idea’. However, the business continues to generate strong returns on tangible assets and considerable levels of cash flow, that allows it service US$20billion of debt while comfortably paying US$1.60 per share in dividends each year. Buffett has expressed his disappointment at the break-up plans but I don’t believe he intends to sell Berkshire Hathaway’s 27.5% Kraft Heinz stake in the open market. After all, he receives a 6% dividend yield and already has a considerable cash pile at Berkshire. In the 2018 interview (see above) at 6 minutes 4 seconds Buffett states “I like the businesses we have, very much I’ll be happy to be in Kraft Heinz 5 years from now 10 years from now.” Instead, it’s my belief that this is an issue of ‘agency’. Buffett would like new ‘agents’ to run the business, who will focus on the consumer and on the business of packaged goods. Buffett has sent out a signal to the industry that he would consider selling, if the whole company is bid for. Buffett can play king-maker here, and at the same time find new management. In my opinion, the risk is to the upside NOT to the downside.
Disclosure: Roger Breuer, CFA, ACCA is a senior analyst for Ocean Equity Fund based in London. Ocean Equity Fund has recently bought shares in Kraft Heinz. This article is NOT to be taken as financial advice and simply expresses the opinion of the author.