Warren Buffett forced to defend relationship with Brazil's 3G Capital

Berkshire Hathaway shareholders are expressing unease at the company's deepening relationship with private equity group 3G Capital, ahead of an expected wave of job losses at newly acquired food group Kraft.

Warren Buffett was forced to defend 3G's record of aggressive cost-cutting at his company's annual shareholder meeting at the weekend, triggering debate about whether the association with the Brazilian group was undermining the Berkshire chief executive's cherished reputation as a benign acquirer of businesses.

In contrast to Mr Buffett's hands-off approach to running Berkshire's subsidiaries, 3G has replaced management and axed thousands of jobs at Heinz, which it bought with Berkshire in 2013.

Kraft, the maker of US dinnertime staples such as macaroni cheese, will be folded into Heinz when the Berkshire-funded takeover closes later this year, and 3G is promising $1.5bn in annual cost savings.

3G laid off 7,000 Heinz staff within 18 months of taking over, and also cut jobs at Tim Hortons, the Canadian coffee chain it merged with Burger King using financing from Berkshire.

"I tip my hat to what the 3G people have done," Mr Buffett said, in response to a long-time Berkshire shareholder who said the private equity firm's management practices gave him "heartburn".

There were "considerably more people in the job than needed" at the companies 3G bought, adding: "I hope our Berkshire companies are not being run with more people than they need, either."

Mr Buffett said he "tolerated" Berkshire managers who were slow to make cuts at the company's own subsidiaries, but that it did lay off staff in shrinking businesses, such as newspapers.

Andrew Ross Sorkin, a journalist who selected shareholder questions for Mr Buffett, said many were on the topic of 3G, including from one investor who asked whether Berkshire's and 3G's cultures were compatible.

The issue is particularly sensitive to Berkshire shareholders, 40,000 of whom gathered in Omaha, Nebraska, for the meeting, and who view Mr Buffett as a class apart from the bosses of other conglomerates.

Mr Buffett, too, lauded Berkshire's unique culture, which has included an explicit promise not to introduce sweeping cuts at the companies it acquires. That promise makes it more likely that family business owners, in particular, will sell to Berkshire without demanding a premium price.

Larry Cunningham, whose book Berkshire Beyond Buffett argued Mr Buffett's hands-off management style was vital to the company's success, said the 3G deals were not the same as Berkshire takeovers.

"If 3G destroys rather than improves Heinz/Kraft, then Berkshire can sell, without violating any principle, but if 3G improves the investee to Berkshire standards, it can acquire the whole. 3G does the work of both getting the deal and making the changes, while Berkshire has an option on the upside, both economic and cultural."

The issue of jobs and labour relations permeated this year's annual meeting. Outside, pilots at Berkshire's NetJets subsidiary protested for better conditions, as fractious two-year contract negotiations dragged on.

Inside, Mr Buffett warned against the big rise in the minimum wage that US unions have been campaigning for from politicians. He said that a dramatic rise would cause job losses, and said he preferred income tax credits as a way of reducing inequality.

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