A Tax Inefficient Sale
In his recent CNBC Squawk Box interview, Warren Buffett was sharply critical of Kraft management's decision to sell its pizza business to Nestle, and unnecessarily incurring a $1.2 billion tax bill to do so.
"Well, I think-I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has, having paid $1.2 billion more for it than we received in terms of cash......
Well, when you look closely, you find $3.7 billion becomes $2.5 billion. And it was an enormously tax inefficient way to get rid of it. If you wanted to sell it, it was tax inefficient. Back when Kraft got rid of Post cereals, they did it in a tax efficient way. It's not that they don't know how to do it, but in this case, they did it in an enormously tax-inefficient way. When you have a business with virtually no basis, Procter & Gamble's gone through this, Kraft, other people. There are ways to handle spinoffs that avoid cutting the government in for almost one-third ownership of the business. And unfortunately, they headlined the $3.7 billion. I don't think I have read anyplace about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion in sales and makes $280 million. And giving up $280 million of earnings in a business that's been growing over the years for $2.5 billion of cash, I think, is a big mistake and I think it's a bigger mistake when you're paying -probably counting all of the costs involved including the undervaluation of the Kraft shares given, you're probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake."
CNBC Squawk Box Interview, January 20, 2010