This page has been archived and commenting is disabled.
Thank You, Fed - Warren And Jorge Are Thrilled By Another Play Day In The Casino
Submitted by David Stockman via Contra Corner blog,
Kraft shareholders woke up $12 billion richer this week and for that they should thank their lucky stars—–or at least send a case of Cristal to Janet and her merry band of money printers. Having passed-out free money to carry traders for 75 months running and after inserting a liquidity and verbal “put” under every market dip since March 2009, the money printers had generated downright giddiness (as of Tuesday night!) in the Wall Street casino.
And when it came to the shares of Kraft, the casino was indeed giddy even before the deal was announced. A few months ago when it was trading about $55/share, the company was already valued at 31X its $1.75 per share of net income for the year then ending.
So now those fast money traders who somehow “got wind” of the deal early are just plain tickled pink. At $83 per share they are up 50% on their cash position and several hundred percent on their call options. That’s quite the pay day, amounting to about 47X last year’s earnings on Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia cream cheese, Planters peanuts and Velveeta spreads.
Setting aside the Kool-Aid, you might wonder how hot dogs, peanuts and sliced cheese are really worth such a snappy valuation multiple. Actually, however, that’s not the complete wonder of it. In the year just ended, Kraft posted an hardly impressive $2.9 billion of adjusted EBITDA less CapEx. Yet the casino is now pegging its total enterprise value (TEV) at $58 billion—-including about $9 billion of net debt.
Can you say 20X free cash flow? Well, Warren Buffet can. Gushing away in a statement accompanying the deal, the Oracle of Omaha said:
“I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
We will get to Jorge (Jorge Paulo Lemann of 3G Capital) next, but here’s where the Fed and its casino come in. Kraft is a dead in the water financial engineering plaything of Wall Street. It was spun-off from its parent company in 2012 purportedly to unlock hidden value, but the only thing it has unlocked is a torrent of cash payments to its shareholders.
That started with a $7.2 billion “goodbye” dividend gifted to its parent company (Mondelez International) in conjunction with the spin-off. Including dividends and share repurchases since then, Kraft has distributed a total of $10.4 billion in cash to shareholders over its brief three-year life.
And where did it get the $10 billion? Not surprisingly, it wasn’t out of free cash flow from operations——-which amounted to $3 billion during the period. Thank you, Janet, the $7 billion difference was borrowed, including a sale leaseback of the corporate headquarters. All in, Kraft’s $10 billion of debt costs just 3.0% on an after-tax basis.
Needless to say, while its executives and Wall Street advisors were furiously stripping the cash and loading its balance sheet with cheap debt, Kraft’s tired, over-priced grocery store brands were not going anywhere—- notwithstanding all the promises that the spin-off would catalyse a new era of growth.
To wit, net sales of $18.2 billion in 2014 were just a tad above the $17.8 billion recorded in 2010, meaning that its four year growth rate amounted to, well, 0.5%. Likewise, operating income last year of $3.0 billion was actually identical to the figure back in 2010. In short, not the stuff of a 47X PE multiple.
To be sure, the Wall Street hucksters claim the deal multiple is much more reasonable because 2014 results were marred by large “non-recurring” pension charge. Yes, and the year before that the company’s results were pumped higher by the same accounting shenanigans. So in the analysis above we just took Kraft’s three-year average of operating free cash (EBITDA less CapEx) adjusted for its footballing of pension charges.
As indicated, the average number for this flat-lining collection of long-in-the-tooth brands is $2.9 billion. In short, the “lumpy” accounting doesn’t matter—–the casino is valuing a zero-growth enterprise at 20X operating free cash flow.
But wait. When you combine Kraft with some stuff that is even more yesteryear—-Heinz’s ketchup, sauces, soups, beans, pasta and Ore-Ida potatoes——there comes an explosion of synergies. Why, the companies said so themselves:
……. they estimated they could find savings of $1.7 billion annually by the end of 2017 through cost reductions and efficiencies of scale.
Right. Both Kraft and Heinz have been harvesting merger synergies and announcing cost-cutting campaigns for the last 30 years——billions and billions worth. So only in today’s Wall Street casino can it plausibly be claimed that another $1.7 billion of earnings will be plucked out of the same cost wells. No Sweat.
As a practical matter, virtually all of Kraft’s $3 billion of operating free cash flow is generated by its US and Canada operations. By contrast, 62% of Heinz’s $11 billion sales are generated outside of the North America. Indeed, Heinz has only $2.9 billion of cash costs in all of North America. So good luck with eliminating two-thirds of those dollars in a brutally competitive, drastically over-supplied industry of flagging mid-market grocery brands. To make that work will take more than Kool-Aid—–even the kind dispensed from the Eccles Building.
For the moment, however, the latter kind is just what Warren Buffet and Jorge Paulo Lemann are so thrilled about. The combined operation is claimed to be worth $70 billion today and going up from there:
Kraft will hold a nearly 50 percent stake in a company worth more than $70 billion. Because Heinz is private, its equity value is not publicly known, but people briefed on the matter said the combined company is expected to be worth as much as $100 billion by 2017.
Let’s see. Heinz’s 2014 net income was $650 million and that was down from about $1 billion prior to what amounted to an LBO sponsored by Berkshire-Hathaway and 3G Capital. Even after adjusting for the pension “one-timer”, Kraft’s net income was barely $1.9 billion. So call it $2.5 billion of net income on a post-merger basis.
Needless to say, at the hoped for $100 billion of equity value—– that’s a 40X multiple or one humungous pile of synergies. Indeed, the combined company’s entire worldwide payroll is only 46,000, which computes out to a total compensation expense of $3.5 billion, at best. Maybe Warren and Jorge plan to eliminate the whole thing.
In fact, the merger makes no business sense. Spread all over struggling but highly diverse consumer economies in Brazil, Europe and North America there are likely to be as many diseconomies of scale as there are synergy savings. Besides, there is nothing special about putting Heinz ketchup on Kraft Macaroni & Cheese, and certainly not 40X type of special.
But at the end of the day, Warren and Jorge are not counting on synergies and savings. They are counting on Janet and Mario to keep the cheap debt flowing and the casino smoking.
That’s been working for them for years. Thus, 3G Capital did not roll-up the Anheuser-Busch InBev global beer behemoth by scraping together nickels and dimes of new equity. In fact, in the process of buying up beer brands on three continents, the company’s debt grew from $5 billion in 2005 to $50 billion at present. Nor has St. Warren been loath to borrow against Berkshires trove of assets, either. During the last decade its debt has risen from $14 billion to $80 billion.
Any why not. Thanks to the 12 money printers domiciled in the Eccles Building, whom Buffet never stops praising for bailing out Wall Street and Berkshire’s enormous mountain of derivatives in 2008, the after-tax cost of capital is close to free.
Once upon a time that kind of blatant central bank distortion of capital markets would have been viewed as beyond the pale. Indeed, Jay Gould, Andrew Carnegie and JP Morgan were no saints, but they didn’t have a free money central bank financing their empire building, either.
Nor did their riches grow from strip-mining the cash out of already long-in-the-tooth/no-growth empires of beer, cheese, nuts and burgers. They actually built companies and invested massively in new technologies and new productive assets.
So what has transpired is another day and another play in the casino. This ketchup and mac merger could not be more emblematic of how the Fed’s destruction of honest financial markets has fatally deformed American capitalism.
Warren and Jorge are understandably singing Janet’s praise. Everyone else should be getting out the torches and pitchforks.
»
- 18978 reads
- Printer-friendly version
- Send to friend
- advertisements -
too big to jail
Ketchup on your cheap Mac-n-Cheese?
They should go to jail where they can have that for lunch.
That kinda stuff will cost you EXTRA in jail... They use that [& cigs] as poker chips...
If layoffs follow this merger... then the crying will begin
Layoff List: http://www.dailyjobcuts.com
.
actually, that's the only way i eat 'em!
Most of the garbage both of them make is laced with added sugar. This is not fucking brain surgery here if people want to be healthy and avoid looking like a fat tub of shit they need to eliminate added sugar and try to eat 5-7 times per day of reasonable meals/snacks that have a good carb, good protein, and good fat. Buffet has made a killing off of the sheep sucking down added sugar like morons.
Chicken, salmon, turkey, almonds, avocados, whole grain brown rice, oatmeal, whole grain bread, sweet potatoes, and veggies and throw the rest of the shit out the window.
Amen, however don't drop the F bomb or that old guy with the kool aid guy for his avatar might reprimand you in fancy words.
High-Fructose Corn Syrup is the name of the game in 'sugar' over in the US. Nasty, cloying, pro-diabetic bullshit which bypasses important intracellular energy regulating mechanisms. We try to avoid that stuff over here in Europe and use real sugar instead.
We're all killing ourselves with sugar, just a little more slowly over this side of the Atlantic.
@ghostzapper
the thing is: with such big companies the choice is soon gone. they destroy the small ones, that really work and make good and healthy food., the big ones dictate the price, first cheap, so you buy, throw out the smaller ones, than RISE the price.then tell the people , first who (!), then how much and when they are going to get fed. its all about foodcontrol. more important than people think.
and for the agriculture the opposite: lower the price, throw the small ones out, pay them next to nothing, but get yourself a lot of money from the taxpayer, just because you can and have the lawyers to do it. then buy all the land for an apple and an egg, and do cheapest agriculture with poisons and gmo. profit. and grow. and repeat.
and pharma says thanks too, lot of sick people to feed their pills, and lot of other people say thanks too, the whole sick network.
Print Moar Companies please
It's not illegal if you own the people who write the law's......
^THIS^
Finally, an inciteful commentary from Stockman on how the Wall Street corporate looters work. To supposedly save money, Warren Buffet requires employees at his companies to use both sides of a sheet of paper for printing. The cost of paper represents about 1/8 the cost of printing a single page image on a sheet of paper. So the savings from duplex printing are scant, as are the real savings from zero based budgeting. The real savings are from the thousands of layoffs, the sale of real estate and inversions. While the inversions save on corporate taxes, most of the savings are one-shot deals. Just like clear cutting all a forest's trees for timber. Wall Street finance's role model is a Mafia bust-out operation, load a business with debt, take out all the money you can using stock buybacks and high dividends and then bail out with your profits. Buffet's profit center for decades was GEICO. Thanks to the totally corrupt governments we have had for the past 25 years, Buffet has been able to expand Berkshire exponentially. That can't go on forever, even funded by the 2 quadrillion dollars of derivatives generated by Wall Street counterfeiters.
Can't use torches anymore for we are all covered in shit and every turd has its flashpoint.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
It's a big fuckin' club and you and I aint in it.
speakin o' big fuckin' clubs, can we take one to Jorge and Warren?
Jorge Paulo Lemann huh, sounds a bit like Lehman, what has this character been up to since '08 and who are his brothers? Suspect indeed.
Yesterday here in Pittsburgh (aka, hell) the Big Story concerning the Kraft/Heinz merger was what would happen to the name of the Steelers stadium, Heinz Field. Would it remain so named, or change to something different?
To everybody's delight, the stadium will keep its current name. And all of the little children disguised as adults were pleased and appeased.
Holy shit, that's a lot of children!
Fuck no, wallstreet buys the team and changes the name of the team to THE STEALERS!!!
It will be re-named Maracana do Norte and the Steelers will join the MLS. WTF?
The bigger problem is all the people that are going to get fired. The suckers, I mean, bondholders will have to fend for themselves.
PIK means "paid in ketchup", right?
the author is complaining about business as usual.
I like macaroni and cheese, and I like tomatoes, but lets see what in in heinz and kraft....
Ingredients in kraft macaroni and cheese..
http://foodbabe.com/2013/06/06/victory-ny-times-posts-kraft-mac-cheese-w...
heinz ketchup is 25% sugar, and lotsa high fructose corn syrup whick kills...
http://blog.fooducate.com/2009/02/24/eleven-ketchup-facts/
The FDA and the buffets want us all dead...
Ever have Velveeta?
That stuff is a wretched mix of pseudofood that gets extruded from a machine at 70 miles per hour. (I know, I worked on the plant that makes it.)
And. It. Tastes. Good.
Sorry foodies, but it just does. Three hundred million 'Murkins aren't wrong.
Just three million murkins getting sicker and costing/paying money for a shitty existence. :Like big mickee D's, "I'm lovin it"?
I wish someone had the balls to tell buffy the vampire buttfucker that money from deception is really not cool, at all.
I can't wait for the fucknut to apply for dancing with the stars.
Society is declining fast because people with responsibility are not acting responsible. I'm sorry for I just don't get it.
Surely you jest. Buffet smells like harmless, virgin aspen wood chips (hamster cage material).
We were told Cutie pie Buffet eats like a child every day. Coca-Cola and fudge bars. That’s how he keeps his youth.
On March 10th, Botarelli Research delivered this news:
"In separate transactions earlier today, one trader bought 4,000 KRFT March 62.50 calls for $0.40, and another trader bought 10,000 June 67.50 calls for $0.70."
Do you think maybe some insiders might have been frontrunning a bit?
Yesterday Botarelli reported:
"Just about two weeks ago we reported that a speculator bought KRFT 10,000 June 67.50 calls. Today they made an absolute killing. Just how much of a killing you ask? This trader paid $0.70 per call two weeks ago, and today those calls closed at $15.75 apiece, good for a 2,250% gain. In pure dollar terms, the initial $700,000 investment has now turned into $15 million in profit."
And since these trades were made by the right people (nudge nudge wink wink), nothing will be done about it.
Torches and pitchforks, indeed
Janet and Mario have every intention of keeping it going for years to come. The casino is permanently open.
Did you say cool aid?
the fast money traders think this is the best thing a bunch of ass clooens
the fast money traders think this is the best thing a bunch of ass clooens
I hope I live long enough to visit the Buffet and Soros gravesites. What I do there will be private. The sad part is those vampire zombies will likely outlast me despite the age differential.
<font"snark">EVERYTHING IS AWESOME! Now we all have the skeleton key to figuring out which zero-growth dogs to "invest" in (just multiply their operating free cash flow times-20 and find the ones trading below that "value"</font>
Yes, this kind of M&A outrage makes me want to stick my head out the window and in a loud angry voice say: "I'm mad as Hell... and I am not going to take it any more!".
Trouble is, my neighbors have all the windows shut and the blinders drawn.
I wonder how many members of congress bought call options.
Hey, hey, hey!!!!! That's TOTALLY legal buddy!
"Both Kraft and Heinz have been harvesting merger synergies and announcing cost-cutting campaigns for the last 30 years"
'harvesting merger synergies'...?
Oh my... Not another Dack dot com 'Web Economy Bullshit Generator' moment...?
'Click to make bullshit':
- 'morph virtual initiatives'
- 'recontextualize enterprise eyeballs'
- 'integrate innovative markets'
- 'embrace intuitive web services'
- 'exploit viral solutions'
- 'enable extensible e-tailers'
- 'syndicate rich mindshare'
There are some synergies available but this is mostly about siphoning off cash at various intervals. Its easy to make money when you have a LOT of it especially at these rates.
If Americans had a brain in their head, they would boycott these products for the rest of their life. The extra revenue to the off brands and up and comers will help them improve their products. Before you know it, that mega overblown outfit will end up like GM. Now, if we can just avoid the taxpayer bailout...
Yep. And if frogs had wings, they wouldn't bust their asses every time they hop.
Warren now controls every EBT shopping cart nationwide.
Growth is not the word for someone amassing greater volume from stealing. It’s called plunder, not growth. If someone robs a bank, you don’t say his earnings have grown.
There is something wrong with a financial system that produces a Warren Buffett. It is described by Frederic Bastiat in “The Law.”
Here’s more, from Jesse’s Café today: “I do think we will have a lot of happy talk about recovery from very serious people, the Fed drones who have gotten into some fairly nice sinecures by going along with the financial flow for most of their careers. Insiders don't talk badly about the mistakes and follies of other insiders.
"They won't be talking about the inferior and unlivable part time jobs that people are actually getting, the stagnant real median wage that is strangling organic demand, or the enormous concentrations of capital that they fostered which is increasingly enabling enormously abusive monopolies that will most likely take a generation of struggle to root out and overturn."
http://jessescrossroadscafe.blogspot.com/
It is us the consumer who is to blame. I just cant see how you dumb mother fuckers can pay 1.00 for a 17 cent box of mac and cheese.
This is the one and only way the rich get richer and you get poorer.
I'll not eat mac and cheese until that is all there is left.
Warren and the insider thieves are the winners…but who are the losers? Answer: Savers and long-term honest investors.
Now there’s a dollar figure to the losses by savers (and this is based on a ridiculously low and incorrect inflation figure) and the significant destruction of the economy because of financial repression. It’s from Swiss Re:
Current high levels of financial repression create significant costs and lower long-term investors' ability to channel funds into the real economy, a new Swiss Re study shows | swissre.com
26 March 2015, ZurichSeven years after the financial crisis, central banks are still keeping interest rates at historically low levels. Low interest rates help finance governments' debt and lower funding costs, as well as support growth. But such policy actions cause financial repression. This comes at a substantial cost for both households and long-term investors such as insurance companies and pension funds, according to a new Swiss Re report Financial repression: The unintended consequences.
With continued increases in bond prices, expensive stocks and relatively low volatility, the impact of financial repression on markets is undisputable. Meanwhile, the impact of foregone interest income for households and long-term investors has become substantial: in the US alone, savers have lost about USD 470 billion in interest rate income (net) since the financial crisis (2008-2013).
Over the same period, EU and US insurers have lost around USD 400 billion in yield income. This currently corresponds to an annual "tax" of roughly 0.8% of total financial assets on average, lowering long-term investors' capacity to channel funds to the real economy.
Swiss Re's own index, the first such index to measure financial repression, shows that financial repression remains very high, albeit down from its 2011-2012 peak. The major driver of change post 2007-2008 has been monetary policy….
For the rest of the report:
http://www.swissre.com/media/news_releases/nr_20150326_financial_repression.html#inline
Indeed, Jay Gould, Andrew Carnegie and JP Morgan were no saints, but they didn’t have a free money central bank financing their empire building, either.
They had the same central bank ... Rothschild.
Fuck Buffett. Old fucking insider pirate.
Let me tell you a bedtime story.....
Once upon a time there was a big bad company that sold cigarettes. Cigarettes were bad but everybody bought them, and it was a highly profitable business for Philip Morris. They had so much money in profits, they paid an 8% dividend on their stock (80% payout of profits). That boosted their stock price ever higher each year they raised the dividend. INSIDE the company, the retained earnings piled so high, they had to figure a way to put it to work. Then the lightbulb went on!: Buy FOOD companies! Everybody has to eat, right? So Big MO went on a buying spree: they bought General Foods, they bought KRAFT (in the '80s, check Wiki), RJReynolds was on the same track as MO and bought Nabisco. RJR fell prey to KKR and as part of the LBO guess what? They sold the food part to Big Bad MO! YES! O.R.E.O. baby! And wheat thins.......
They had Miller Beer, the #1 Lite Beer in the 80's (they held the trademark on the 4 letter word LITE) to this day, for beer), they had the growth stock record clinched, better than Coca Cola, considering re-invested dividends.
What happened at Philip Morris? These super-smart people with the smartest lawyers on the planet devised a way for their shareholders to make huge gains, rivaling the master JD Rockefeller and Standard Oil. They knew that 100 shares bought in 1974 was already returning 100% of purchase price in QUARTERLY DIVIDENDS by the end of the 20th century. So rather than return money to shareholders, they returned SHARES OF STOCK in other companies. Kraft was spun off, MO sheareholders got free stock in Kraft. Then Kraft split itself into 2 companies, Kraft and Mondelez, after acquiring Cadbury. Irene Rosenberg CEO and Gold Star Girl Scout carried the baton that MO passed to her (dumping frozen pizza on the way). USA tabacco and International tabacco were also split and returned to shareholders as a new stock PMI. Along the way, a new name ALTRIA was adopted although the stock symbol is still "MO".
Altria has a 38% stake in South Africa Breweries (SAB) who also owns valuable Coca-Cola businesses in North & South Africa.
The Point Is: It's not Warren Buffet who is the value creator, it is the brilliant minds at Philip Morris. The shareholders of MO reap the benefits of the buyout of Kraft for the 2nd time. Dave Stockman is commenting on today's picture. Philip Morris played Warren Buffet and 3G PERFECTLY.
MO shareholders: To The Bank!
Excuse me while I buy some shares in Campbells.
Buy Altria instead.