Warren Buffett
Photograph by Daniel Acker — Getty Images
By Stephen Gandel
August 6, 2015

Mondelez might even be too sweet for Warren Buffett’s six-year-old taste buds.

On Wednesday, activist investor Bill Ackman said his hedge fund, Pershing Square Capital Management, had acquired 7.5% of the snack-food giant. Ackman would like Mondelez (MDLZ) to cut costs or be sold. People close to Ackman are hinting that he thinks a likely acquirer could be Kraft Heinz Co., which was formed earlier this year when Warren Buffett’s Berkshire Hathaway (BRKA) and Brazilian investment firm 3G Capital’s Heinz brought Kraft, which itself was spun out of Mondelez three years ago.

Ackman is, in essence, trying to put the band back together. But doing so would be costly, even for Buffett. The Berkshire CEO has built his reputation on being a thrifty manager and a value investor. But recently he has been more and more willing to pay up for deals. Buffett’s company, along with 3G, paid 20 times earnings when they bought Heinz two and a half years ago. That’s only slightly less than the P/E ratio of the S&P 500, which many think is overvalued. The Kraft deal valued that company at 25 times earnings.

 

A Mondelez deal would likely have to be an even richer price for the maker of Oreos and Ritz crackers. The company’s shares are up 27% this year. At their current price of a little over $46, the company already has a P/E ratio, based on this year’s expected earnings, of 26. But there is likely to be some premium on that, as there is with most acquisitions. Berkshire and 3G paid 20% and 36% more than the market price for Heinz and Kraft, respectively. That would take the price north of 30 times earnings for Mondelez.

One mitigating factor, which Ackman has hinted at, is 3G’s legendary cost cutting. If 3G were to cut costs out of Mondelez, that would make the company more profitable, and as a result, a cheaper deal than it seems. But Mondelez has already cut its costs, which were $2.2 billion lower in the first six months of this year then they were in the first half of 2013. The company would have to cut another roughly $2.3 billion more in expenses, on an annual basis, to bring the price of a Mondelez deal down to what Berkshire and 3G paid for Heinz. But that was what they paid before 3G’s brutal cost cutting, which presumably was factored into the price of that deal. All of that cost cutting may have made the Heinz deal cheap. But it would be hard to make the same argument for Mondelez.

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