Last weeks big whale news was Warren Buffett bought 8.6 percent of Kraft.

Why now?
Buffett needs to make large purchases for the investment to move the needle at Berkshire Hathaway. Altria (Phillip Morris) used to own 89% of Kraft. To buy 8.6% of Kraft Buffett would have had to buy 78% of the shares that traded. There was no way Warren Buffett could have purchases such a substantial stake in Kraft without moving the price significantly higher. It is quite possible that he had his eye on Kraft for some time. Altria’s spinoff of Kraft in April last year gave him the opportunity to build a big stake as existing Altria shareholders who recieved Kraft shares probably sold them off.

Why Kraft?
I must admit I don’t see this as a value pick. I think its fairly priced between $30-$35. I guess Buffett sees an improved future for Kraft. Kraft is now an independent company, the new CEO Irene Rosenfeld seems very competent. Kraft has also been undergoing some positive changes. The letter from Irene Roselfeld in the Annual Report points to an interesting change in how Kraft now views its products. Read Page 18 of the Annual Report. Finally Irene mentions the following “However, we will still have ample capacity for acquisitions. Our focus will be on building scale in key international geographies and on gaining access around the world to new categories, new capabilities and new technologies.” Kraft has a collection of great brands including Oreo, Gevalia, Jell-O, to Milka and Toblerone, but it currently has very little exposure to emerging markets. Kraft has an opportunity to increase sales and profits dramatically IF it expands its international business. Currently only 13.5% of Kraft sales are outside US/EU, compare this to 40.1% for Nestle and you can see where the opportunity lies. Irene has already taken the first step by buying Group Danone’s Snack business which get 25% of its revenue from China, Russia, Poland, Indonesia and Malaysia. Kraft can use the manufacturing/sales/marketing/distribution of the Danone business to unleash its US brands into the emerging markets.

Are these reasons enough to buy Kraft? Not for me, but as I said I probably missed what Buffett sees.

Disclosure: I do not own shares of Kraft but I have owned them in the past.