Kass: Spitting Out the Wrigley News

Did Berkshire get its money's worth?
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These blog posts originally appeared on RealMoney Silver on April 28.

Grantham Digs Deeper

7:23 a.m EDT

There are a number of modern day investors that I truly admire (all for different reasons):

  • Berkshire Hathaway's (BRK.A) - Get Report Warren Buffett for his patience, logic of argument and sense of a "margin of safety";
  • Soros Fund Management's George Soros for his ability to aggressively press an investment thesis;
  • Capital Growth Management's Ken Heebner for his capacity to isolate (and concentrate in) today's and tomorrow's market leaders;
  • Fidelity Magellan's Peter Lynch (retired) for his adaptive, bottom-up approach to investing;
  • Omega Advisors' Leon Cooperman for his work ethic and his thorough company knowledge (as he goes "belly to belly" with managements); and
  • SAC's Steve Cohen and Steinhardt Partners' Michael Steinhardt (retired) for their trading acumen and ability to adjust to different market cycles.

In terms of providing a (written) sense of historical perspective and in expressing and weighing the current risks/rewards in the equity and fixed income markets, however, GMO's Jeremy Grantham has no peers.

Here

is Grantham's first-quarter 2008 letter to investors. It is a great read and outlines far better than I can the potential risks facing equity investors over the next few years.

What Exactly Did Buffett Buy?

9:02 a.m. EDT

The acquisition of

Wrigley

(WWY)

is being funded by $11 billion from Mars, a $5.7 billion senior debt facility from

Goldman Sachs

(GS) - Get Report

and from $4.4 billion of subordinated debt from Berkshire Hathaway.

Berkshire has not apparently received equity in the entire Wrigley entity but rather will be purchasing a minority equity interest (for $2.1 billion) in a Wrigley subsidiary at a discount to the share price being paid to the shareholders of Wrigley.

With all the questions being bombarded on Buffett on

CNBC

just now, I would have liked a commentator to ask which subsidiary and why he didn't take a position in the entire company.

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I would also add that the Wrigley deal supports some of my bearish rationale for being short Berkshire Hathaway, in that Buffett's ability to buy the type of world-class consumer franchise that has been his trademark (and at a reasonable price) has diminished based on the size of the Wrigley premium.

Spoiling the Bullish Nondurables Thesis

9:24 a.m. EDT

Jim "El Capitan" Cramer

concludes

that, based on Buffett's Wrigley involvement and his comments on

CNBC

, consumer nondurables are cheap.

I couldn't disagree more.

I am short

Colgate-Palmolive

(CL) - Get Report

,

Kellogg

(K) - Get Report

,

General Mills

(GIS) - Get Report

and

Kraft

(KFT)

-- stocks that are trading between 17 times and 24 times earnings, with between 7% and 10% secular growth rates.

PEG (price-to-earnings-growth) rates of 2 times have no interest for me, especially in the face of the commodity headwinds these companies now face and will likely face for years ahead.

Buffett's Trick Gum Marketing Scheme

11:27 a.m. EDT

Buffett demonstrated his brilliance this morning in the Wrigley deal, not as an investor necessarily but as a marketer.

Why do I write this?

I believe his $4.4 billion of subordinated debt to Mars used to finance a portion of the Wrigley purchase was a sideshow.

The real brilliance is how Buffett has marketed himself and Berkshire Hathaway as the safe "go-to guys" without an agenda.

As a result, Buffett got a sweetheart deal and was able to invest an additional $2.1 billion at a discount to the share price paid to other Wrigley shareholders in the tender.

Here is the precise wording of the press release:

Funding for the transaction includes about $11 billion from Mars, a $5.7 billion committed senior debt facility from Goldman Sachs, and $4.4 billion of subordinated debt from Berkshire Hathaway Inc. At closing, Berkshire Hathaway has committed to purchase a minority equity interest for $2.1 billion in a Wrigley Co. subsidiary at a discount to the share price being paid to the stockholders of Wrigley.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.

At the time of publication, Kass and/or his funds were short Berkshire Hathaway, Colgate-Palmolive, Kellogg, General Mills and Kraft, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.