2013: Has the media correctly characterized the Heinz deal?

BECKY QUICK: This is a question that comes from Ben Knoll, who happens to be the chief operating officer at the Greater Twin Cities United Way.

And he writes in that after the Heinz deal, there was a column that was written indicating that you had gotten the better end of the Heinz deal from your Brazilian partners [3G Capital].

That column said that your return was likely to come from the preferred stock dividends, with the common equity portion being dead money.

It also said that the way the deal was structured indicated your low expectations for the market overall.

Is this an accurate portrayal of the deal and of your expectations for the market overall?

WARREN BUFFETT: No. It’s totally inaccurate.

The — it’s interesting. [3G Capital co-founder] Jorge Paulo Lemann and I were in Boulder, Colorado, in early December. And I can’t remember if it was — yeah, on the way to the airport or when we got in the plane. But he said that he was thinking about going to the people at Heinz and proposing a deal and would I be interested.

And I, because I knew both Heinz and I knew Jorge Paulo, and I thought highly, very highly, of both, I said, “I’m in.”

And maybe a week later — I don’t remember exactly how long — I received from Jorge Paulo, who I had known for many years starting at Gillette when we were both directors — I received a term sheet on the deal and another sheet on the governance procedures that he suggested.

And he said, “If you got any thoughts about changing this, just let me know.” They were just his thoughts.

It was an absolutely fair deal, and it was — I didn’t have to change a word in either the term sheet or the governance arrangement.

Now, we actually, Charlie and I, probably paid a little more than we would have paid if we had been doing the deal ourselves, because we think that Jorge Paulo and his associates are extraordinary managers.

They’re both classy, and they’re unusually good, and so we stretched a little because of that fact.

We like the business, and the design of the deal is such that if we do quite well over time at Heinz, that their 4.1 billion will achieve higher rates of return than our overall 12 billion.

We have a less-leveraged position in the capital structure than they have. We created — they wanted more leverage, and we provided that leverage on what I regard as fair terms and what they regard as fair terms.

If anybody thinks that the common is dead money, you know, we think they’re making a mistake.

But we’ll know the answer to that in five years.

But the design of the deal, essentially — we have more money than operating ability at the parent company level, and they have lots of operating ability and wanted to maximize their return on 4 billion.

So my guess is that five years from now or ten years from now, you will find that they’ve earned a higher rate of return on their investment. But because we put more dollars in, we will have received that same rate of return on our 4 billion, plus of cap common equity, but we also will have received a very fair return on the 8 billion that we put in that created more leverage for them.

Charlie?

CHARLIE MUNGER: Well, as you said, the report was totally wrong. (Laughter)

WARREN BUFFETT: That’ll teach them. (Laughter)