Berkshire Gets New Headache From Its Kraft Heinz Investment

(Bloomberg) -- The last time Berkshire Hathaway Inc. reported results, the contribution from its stake in Kraft Heinz Co. was a $2.7 billion charge. This time, it was a blank space.

Kraft Heinz is now more than two months late in publishing its 10-K annual regulatory filing, meaning it can't report first-quarter results to its biggest shareholder. Berkshire was forced to exclude the stake from its first-quarter results, which featured a 5 percent jump in operating earnings.

Warren Buffett played a crucial role in the formation of Kraft Heinz, teaming up with 3G Capital to help create the merger of Kraft Foods Group Inc. and H.J. Heinz in 2015. The company in February took a $15.4 billion writedown and disclosed a subpoena from the Securities and Exchange Commission, and Buffett said that month he wouldn't sell his stake or buy more.

At the company's Q&A with shareholders, Buffett and his deputy Charlie Munger mounted a strong defense of 3G's Jorge Paulo Lemann, with Buffett going so far as to call him a “marvelous human being.” They noted that the Brazilian billionaire has more of a taste for leverage than Berkshire does. The private equity firm has slashed the Kraft Heinz workforce, prompting some investors to question whether the company ignored consumers' changing taste.

“I think both they and we, I know we, did underestimate not what the consumer is doing so much, but what the retailer is," Buffett said.

Read: Lemann Says 3G Has to Focus on Consumers After Kraft Heinz Rout

Today, there appears to be more unrest at the top of Kraft Heinz. Eduardo Luz, the company's chief marketing officer, has decided to leave at the end of May after six years at the company, a company spokesman said. The company said last month that CEO Bernardo Hees will be replaced.

Analysts have speculated that the delay in Kraft Heinz's 10-K filing is due to the SEC investigation. S&P Global Ratings put the company on a negative credit watch due to the delay. Kraft Heinz said in a March 15 statement that it expected to file “in the coming weeks.” The company's shares are down 24 percent this year, after dropping 45 percent in 2018.

“It's pretty unusual,” Buffett told CNBC before Berkshire's annual meeting. “There's something going on.”

Accounting rules require Berkshire Hathaway, which owns more than a quarter of the company, to include its share of Kraft Heinz's earnings in its results. Berkshire said in a filing today that the carrying value of its investment was $13.7 billion, while the fair value based on Kraft Heinz's stock price was $10.6 billion. Berkshire received $130 million in dividends in the first quarter from the stake.

--With assistance from Hailey Waller.

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, James Ludden

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