- Warren Buffett traded a chocolate company's shares for cocoa beans in an unusual arbitrage in 1954.
- Hyatt Hotels' Thomas Pritzker is the son of Jay Pritzker, who designed the stock-for-beans program.
Warren Buffett once swapped a chocolate company's shares for cocoa beans in a strange but lucrative arbitrage. Thomas Pritzker, Hyatt Hotels' executive chairman and the billionaire son of the man who came up with the stock-for-beans offer, told his father's side of the story during a recent shareholder meeting.
Jay Pritzker designed Rockwood & Company's unusual buyback program to cash in on a spike in the price of cocoa beans, while also slashing its outstanding shares in a tax-efficient manner. He detailed his plan during Rockwood's shareholder meeting in 1954, and received a blunt piece of feedback from a member of the crowd.
"A 24-year-old kid comes up to them and says, 'I didn't understand anything you just described,'" Thomas Pritzker recalled. "Dad says, 'Great, let's go have a cup of coffee. It's a really cool deal. I'll describe it to you.' That 24-year-old was Warren Buffett."
After Pritzker laid out the program to Buffett, the young investor spotted a way to make some money. He spent several weeks buying Rockwood shares, exchanging them for warehouse receipts for cocoa beans, then selling those at a commodities exchange for a nice return.
"The profits were good and my only expense was subway tokens," Buffett said in his 1988 letter.
Buffett crossed paths with Jay Pritzker several more times during his career, most notably when Buffett's Berkshire Hathaway bought Marmon, the Pritzker family's industrial holding company. Berkshire purchased a majority stake in 2007 for $4.8 billion - then its biggest-ever cash purchase - and raised its ownership to 100% by the end of 2013.
Thomas Pritzker touched on his father and uncle's rationale for selling to Buffett during the recent Hyatt meeting, according to a transcript provided by AlphaSense/Sentieo.
"The reason we did it with Warren is our colleagues were very important to us, and we wanted it to land in a home that was as similar to us as we could possibly find," he said. "So we didn't hold an auction. We didn't go through a normal process. We went directly to Warren. And basically, he made a decision in two and a half hours."
Buffett probably signed off on the deal so quickly because he was confident in Marmon's management, and trusted the Pritzker family had built a high-quality operation, Thomas Pritzker said.
"Warren has watched us and we have watched Warren for many, many decades and have very similar views of life," he continued. The executive added that he hasn't spoken to Buffett about Hyatt, but he doubts the Berkshire chief is a fan of the asset-heavy hotel business.