Above The Fray

A Necessary Marriage

There has been much discussion in the media recently about investment firm 3G Capital. The firm was founded in 2004 by Brazilians Jorge Paulo Lemann, Carlos Alberto Sicupira, Marcel Herrmann Telles and two others. Jorge Paulo Lemann is widely acknowledged to be the wealthiest person in Brazil and he has worked together with Beto Sicupira and Marcel Telles since the three of them started Garantia in 1971. It became Brazil’s most successful investment bank before being sold to Credit Suisse in 1998. They are also highly regarded for having parlayed their investment in Brahma, a tiny Brazilian brewer, into control of Anheuser-Busch Inbev, the world’s largest brewer, through a series of acquisitions over a twenty year period.

3G Capital is particularly well known to Canadians after the recent takeover of Tim Horton’s by its Burger King Worldwide subsidiary. 3G also attracts much attention because of its affiliation with Warren Buffett and Berkshire Hathaway which has partnered with 3G on its Heinz acquisition as well as the Tim Horton’s acquisition. There has been much commentary, and no small amount of criticism, about the perceived inconsistency between the managerial approach of 3G and Berkshire Hathaway. In its approach, 3G targets companies that it believes are not well run, and after taking control, it appoints its own people to run the company with massive cost cutting and employee terminations as step one in its managerial playbook. Conversely, Warren Buffett has taken the opposite approach over the years being largely hands off and letting the various Berkshire subsidiary companies function independently.

In my judgment, this seeming inconsistency is not as puzzling as it may first appear. While Warren Buffett might prefer to only make acquisitions where it buys high quality companies that are already well run and then leaves them alone, the ongoing struggle to put staggering amounts of capital to work, has almost forced Warren Buffett and Berkshire Hathaway into a marriage of necessity with Jorge Paulo Lemann and 3G Capital. For perspective, at the end of the first quarter, Berkshire had cash and cash equivalents on its balance sheet well in excess of $50 billion! 3G is very skilled at what it does and by teaming up with them, Warren Buffett is able to deploy more capital than he otherwise would be able to under his existing preferred approach. There is an additional consideration which is critically important to properly understanding the relationship between 3G and Berkshire Hathaway. By partnering with 3G, Berkshire is able to claim that it is only a passive investor rather than an active participant in the cost cutting and change process at the companies acquired by 3G. This allows Warren Buffett to preserve his credibility and reputation as the preferred buyer of choice for those wishing to sell a high quality business where maintaining that business in its existing state is an important consideration for the sellers in selecting a buyer. Put simply, 3G and Berkshire Hathaway have different strategies and the affiliation with 3G allows for a broader opportunity set for the deployment of capital by Berkshire. Equally important, this arrangement with 3G preserves Warren’s well earned reputation as a good home for great businesses that are free to operate essentially unchanged under Berkshire ownership.

Let me end with a couple of predictions. Despite the proven long term owner mentality of 3G’s founding partners, I predict that even 3G will find itself as a seller of one or more of its investments at some point in the future in order to create liquidity for some of the investors in its funds or perhaps for other strategic reasons. I further predict that Berkshire will be the buyer. For example, at some point in the future it doesn’t seem like a stretch to me that Berkshire would gladly buy the 48% of Heinz that it doesn’t own (that will increase to 73% after the merger with Kraft is completed) should 3G want to sell its position. At that point, Berkshire would be getting a company that has fixed its cost and employment structure and more closely resembles the type of wonderful business that Warren Buffett has always preferred buying. As Charlie Munger likes to say……We’ll see.

The partnership between 3G Capital and Berkshire Hathaway may very well have been conceived as a necessary marriage. For sure, it has certainly increased the opportunity set for deploying capital at Berkshire. Equally important, it has been done in a way that preserves Warren Buffett’s credibility and reputation as the first call for anyone desiring to sell a demonstrably great business with management already in place. That sounds like a classic win-win situation to me.

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