Note 7. Investments in The Kraft Heinz Company

On June 7, 2013, Berkshire and an affiliate of the global investment firm 3G Capital (such affiliate, “3G”), through a newly formed holding company, H.J. Heinz Holding Corporation (“Heinz Holding”), acquired H.J. Heinz Company (“Heinz”). Berkshire and 3G each made equity investments in Heinz Holding, which, together with debt financing obtained by Heinz Holding, was used to acquire Heinz.

Heinz is one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, sauces, meals, soups, snacks and infant nutrition. Heinz is a global family of leading branded products, including Heinz^® Ketchup, sauces, soups, beans, pasta, infant foods, Ore-Ida^® potato products, Weight Watchers^® Smart Ones^® entrées and T.G.I. Friday’s^® snacks.

Berkshire’s initial investments consisted of 425 million shares of Heinz Holding common stock, warrants, which were exercised in June 2015, to acquire approximately 46 million additional shares of common stock at one cent per share, and cumulative compounding preferred stock (“Preferred Stock”) with a liquidation preference of $8 billion. The aggregate cost of these investments was $12.25 billion. 3G also acquired 425 million shares of Heinz Holding common stock for $4.25 billion. In addition, Heinz Holding reserved 39.6 million shares of common stock for issuance to its management and directors under equity grants, including stock options. At that time, Berkshire and 3G each owned 50% of the outstanding common stock of Heinz Holding.

In March 2015, Heinz Holding and Kraft Foods Group, Inc. (“Kraft”) entered into a merger agreement under which Kraft shareholders were entitled to receive one share of newly issued Heinz Holding common stock for each share of Kraft common stock and a special cash dividend of $16.50 per share. Kraft is one of North America’s largest consumer packaged food and beverage companies, with annual revenues of more than $18 billion. The company’s iconic brands include Kraft, Capri Sun, Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia, Planters and Velveeta. Upon consummation of the merger on July 2, 2015, Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”).

As of June 30, 2015, we owned approximately 52.5% of the outstanding common stock of Heinz Holding (hereinafter, “Kraft Heinz”). The Preferred Stock possesses no voting rights except as are required by law or for certain matters. The Preferred Stock is entitled to dividends at 9% per annum whether or not declared, is senior in priority to the common stock and is callable after June 7, 2016 at the liquidation value plus an applicable premium and any accrued and unpaid dividends. After June 7, 2021, Berkshire can cause Kraft Heinz to attempt to sell shares of common stock through public offerings or other issuances (“redemption offerings”), the proceeds of which would be required to be used to redeem any outstanding shares of the Preferred Stock. Kraft Heinz has announced its intention to call the Preferred Stock after June 7, 2016 and prior to June 7, 2017, although it has no obligation to do so.

We account for our investment in the common stock on the equity method. We include our proportionate share of net earnings attributable to common stockholders and other comprehensive income in our Consolidated Statements of Earnings and Comprehensive Income. We account for our investment in the Preferred Stock as an equity investment and it is carried at cost in our Consolidated Balance Sheets. Dividends earned on the Preferred Stock and our share of net earnings or loss attributable to common stockholders are included in interest, dividend and other investment income of Insurance and Other in our Consolidated Statements of Earnings.

Summarized consolidated financial information of Kraft Heinz follows (in millions).


	June 28, 2015		December 28, 2014
Assets	$	36,062	$	36,763
Liabilities		20,761		21,077


	Second quarter								First six months
	2015				2014				2015			2014
Sales		$	2,616			$	2,728			$	5,094		$	5,528

Net earnings (loss)		$	(164	)		$	127			$	112		$	322
Preferred stock dividends			(180	)			(180	)			(360)			(360	)

Net loss attributable to common stockholders		$	(344	)		$	(53	)		$	(248)		$	(38	)

Net earnings attributable to Berkshire Hathaway Shareholders *		$	50			$	116			$	200		$	293

*	Includes dividends earned on Preferred Stock and Berkshire’s share of net earnings (loss) available to common stockholders, net of applicable income taxes.

On July 1, 2015, Berkshire acquired 262.9 million shares of newly issued common stock of Kraft Heinz for $5.26 billion and 3G acquired 237.1 million shares of newly issued common stock for $4.74 billion. Immediately thereafter, Kraft Heinz executed a reverse stock split at a rate of 0.443332 of a share for each share. Upon completion of these transactions, Berkshire owned approximately 325.4 million shares of Kraft Heinz common stock, or 52.5% of the then outstanding shares. Following the approval by the Kraft shareholders, the merger transaction closed on July 2, 2015 and Kraft Heinz issued approximately 592 million new shares of its common stock to the former Kraft shareholders. Upon completion of the merger, Berkshire and 3G owned approximately 51% of the outstanding Kraft Heinz common stock, with Berkshire owning approximately 26.9% and 3G owning 24.2%.

Following the consummation of the merger transaction with Kraft, we will continue to account for our investment in Kraft Heinz common stock under the equity method. As previously discussed, the issuance of new common stock by Kraft Heinz for Kraft common stock reduced our ownership of Kraft Heinz from approximately 52.5% to 26.9%. Under the equity method of accounting, the issuance of shares by an investee is accounted for by the investor as if the investor had sold a proportionate share of its investment. As a result, we currently expect to record a non-cash pre-tax holding gain of approximately $7 billion in the third quarter of 2015, representing the excess of the fair value of new Kraft Heinz common stock issued for Kraft common stock over our carrying value associated with the reduction in our ownership of Kraft Heinz.