Wide-moat-rated Berkshire Hathaway (BRK.A) (BRK.B) ended up paying a little less than we had anticipated for narrow-moat-rated Precision Castparts (PCP) [Se lenke til aksjeinformasjon nederst til høyre, red.anm.], with the deal being consummated for $32.4 billion, or $235 per share. Including the assumption of debt, the transaction is valued at about $37.2 billion. We had expected Berkshire to pay as much as a 25% premium to Precision Castparts' closing stock price Friday of $193.88 per share. It ended up paying a 21% premium. This is also 11% higher than our own $212 fair value estimate for Precision Castparts, which should be viewed as a control premium. Warren Buffett is likely to take some flak for paying a premium for Precision Castparts, given his reputation for buying things on the cheap, but it should be remembered that the acquired company's common stock price has declined 19% year to date and is down 15% year over year, as decreased demand for oil and gas equipment has affected overall sales.
Much like Berkshire's purchase of BNSF in 2009 and initial stake in Heinz in 2013, both of which were perceived to be situations where the company was overpaying (vis-a-vis Buffett's longstanding reputation as a value investor), this deal signifies the Oracle of Omaha's evolution from buying fair businesses at wonderful prices to buying wonderful businesses at fair prices. We view Precision Castparts as one of the latter; it has historically traded at a significant premium to its peers, but has traded off during the past year as declining demand for oil and gas equipment has affected overall sales. We expect this transaction to have a positive impact on our valuation for Berkshire, which did not use any stock or debt to fund the deal and has been earning next to nothing on its $60 billion-plus cash hoard. We do not, however, expect the full impact on our Berkshire fair value estimate to be greater than 10%.
Oppdatering 2:
As the day progresses, we are getting more details on widemoat rated Berkshire Hathaway's purchase of narrow-moat Precision Castparts. Early indications were that the insurer would be using all of its $32 billion-plus of excess cash to fund the purchase, but it now looks like Berkshire may be taking on some debt to fund the deal.
In a telephone interview with CNBC earlier on Aug. 10, CEO Warren Buffett noted that Berkshire plans to borrow about $10 billion to fund the acquisition, with the remainder of the purchase price coming from its cash on hand. Given that the insurer had $61.3 billion in cash and equivalents at the end of the second quarter (excluding the $5.3 billion that was used at the beginning of July to fund the Kraft-Heinz deal), the Precision Castparts transaction should reduce Berkshire's overall cash balance to $38.9 billion. Strip out the $20 billion in cash that Berkshire likes to keep on hand as a backstop for its insurance operations, as well as the cash balances that the company maintains on its noninsurance businesses, and the insurer should have about $10 billion in excess cash on its books once the deal is completed (which is expected to take place in the first quarter of 2016).
As such, it makes sense to us for Berkshire to tap the debt markets in order to keep some dry powder on its books, especially with interest rates still at historically low levels, rather than tap out is excess cash balances. For some historical perspective, Buffett agreed to issue about $8 billion in parent company debt to help fund the 2009-10 purchase of BNSF, so this is not out of the ordinary for Berkshire.
Begge notatene opprinnelig publisert på Select.morningstar.com og Morningstar.com 10. august 2015.
