Buffett's $46 Billion in Cash Could Buy Kohl's, Nucor
Aug 3 2007 20:03
Aug. 3 (Bloomberg) -- Berkshire Hathaway Inc. Chairman
Warren Buffett is ready to spend $40 billion to $60 billion on an acquisition, and his opportunities are expanding as stocks fall and leveraged buyouts dry up.
Shares of health insurers, steelmakers and department stores
are as much as 22 percent cheaper than in May, when Buffett said he would ``figure out a way'' to come up with $60 billion for the right deal. WellPoint Inc., Nucor Corp., Kohl's Corp. and dozens more companies are now closer to meeting his investment criteria.
``A time of turmoil among conventional investors on Wall
Street is helpful for Berkshire Hathaway,'' said Thomas Russo,
who helps manage more than $3 billion, including Berkshire
shares, at Gardner Russo & Gardner in Lancaster, Pennsylvania.
Buffett's ``patience has put him in a position where he certainly has the capacity to act.''
Buffett, 76, would have no trouble funding purchases because
his Omaha, Nebraska-based company has $46 billion of cash. LBO
firms, which have agreed to $700 billion of takeovers this year, face higher borrowing costs and skittish investors who won't buy the loans and bonds they need to finance an average two-thirds of their deals.
``If he can pull off a big acquisition, it creates a lot of
value,'' said James Armstrong, president of Pittsburgh-based
Henry H. Armstrong Associates, whose biggest holding is
Berkshire. The shares, which rose at an annual rate of 21 percent over the past two decades, have declined by less than 1 percent this year. They fell $100, or 0.1 percent, to $109,900 in New York Stock Exchange composite trading.
Buffett declined to comment.
Earnings Outlook Berkshire probably will say later today that second-quarter profit from insurance underwriting fell for the first time in a year, according to Charles Gates, a New York-based analyst at Credit Suisse Group. Profit before investment gains or losses rose 7.8 percent to $2.22 billion, or $1,436 a share, on higher interest income, according to Gates, who has a ``neutral'' rating on the stock.
Buffett built Berkshire into a holding company with a $169
billion market value over four decades, using premiums from
insurance units such as Geico Corp. to fund investments and
takeovers.
``We will need major acquisitions'' to produce ``truly
satisfactory'' earnings growth, Buffett wrote last year in his
annual report. Investors shouldn't expect the 2006 gains from the company's insurance units to be repeated, he said in March.
Buffett set his takeover sights higher in May, when he said
Berkshire would spend as much as $40 billion to $60 billion, even selling some of its stock holdings to finance an acquisition if available cash isn't enough. In annual reports as far back as 1998, he told investors he was looking for a $5 billion to $20 billion deal.
WellPoint Stake
His investment criteria include companies with ``good
returns on equity,'' little or no debt, ``simple'' businesses
that he can understand, and consistent earnings, Buffett said in his latest annual report.
Berkshire disclosed in May that it owned 979,000 shares, or
0.16 percent, of Indianapolis-based WellPoint, the second-biggest U.S. health insurer. Shares of the company, which has a market value of more than $45 billion, fell 6.5 percent over the three months through yesterday. WellPoint now trades at less than two times book value, or assets minus liabilities. Its earnings increased at an annual rate of 24 percent since 2001.
Buffett disclosed in March that Berkshire held a 4 percent
stake in South Korea's Posco, Asia's third-largest steelmaker.
The company has a market value that's the equivalent of $49.7
billion.
Interest in Steel
Nucor, the second-largest U.S. steel company, with a market
value of $15.3 billion at yesterday's close, was down 22 percent since May. Earnings at the Charlotte, North Carolina-based company rose to more than $1.7 billion in 2006 from $162 million in 2002. Nucor's debt equals less than 20 percent of its equity.
Nucor is ``probably one of the best steel companies,'' said
Monish Pabrai, who oversees more than $500 million, including
Berkshire shares, as managing partner at Pabrai Investment Funds in Irvine, California. The stock isn't as cheap as Posco when Berkshire bought shares of the Korean company, he said, ``and he doesn't get the currency play.''
After making bets against the dollar starting in 2002,
Buffett now prefers to hedge against the currency by buying
assets outside the U.S. He paid $4 billion for 80 percent of
closely held Israel-based toolmaker Iscar Metalworking Cos. last year, his first non-U.S. acquisition.
Kohl's, Ikea
Kohl's, the fourth-largest U.S. department store operator,
is another company that may appeal to Buffett, said Armstrong,
who has owned Berkshire shares for 23 years. The Menomonee Falls, Wisconsin-based retailer, with a market value of more than $19 billion, has increased earnings at an 18 percent annual rate during the past five years, and debt equals 19 percent of equity.
The question about Kohl's is whether the brand and business
model are dominant enough to insulate the company from
competition, Armstrong said.
Berkshire owns furniture and jewelry retailers, including
Nebraska Furniture Mart and Borsheim's Fine Jewelry. It had a
$936 million stake in Wal-Mart Stores Inc., the world's largest retailer, at the end of the first quarter.
Ikea, the No. 1 home furnishings retailer, is among the
closely held companies that might interest Buffett, said Pabrai, who along with a friend pledged $650,100 in a charity auction to win a lunch next year with Buffett. Founded in Sweden, Ikea is registered in the Dutch city of Leiden.
LBO Costs
Ikea has ``a very powerful brand and business model that
would be hard to duplicate,'' Pabrai said. ``I would think that's almost a perfect fit for Berkshire.''
Officials at WellPoint, Kohl's and Ikea declined to comment,
and a spokesman for Nucor didn't return phone calls.
Berkshire shares underperformed the Standard & Poor's 500
Index for eight of the past 12 quarters as Buffett made only one acquisition of more than $5 billion -- the 2005 purchase of electric utility PacifiCorp in Portland, Oregon. In the same period, LBO firms including New York-based Kohlberg Kravis Roberts & Co. and Blackstone Group LP announced more than $1.6 trillion of deals.
Buffett has said private-equity firms made it more difficult
to find bargains. ``There's nothing worse in life than a
competitor who is willing to pay too much,'' he said at
Berkshire's annual shareholder meeting in May.
`Seven Moons'
Since then, buyout financing costs increased, with yields on
high-risk, or junk, bonds climbing to 9.11 percent last week, the most since September 2003, according to data compiled by New York-based Merrill Lynch & Co. In an LBO, the buyer typically borrows to finance the majority of the cost, using the purchased company's assets to back the loan. The value of buyouts announced last month was two-thirds of June's volume, according to data compiled by Bloomberg.
Buffett completed 18 takeovers of more than $500 million
since 1997, sending Berkshire shares up an average of more than 1.8 percent in the three months after each announcement. That compares with an average decline of 1.8 percent in the S&P 500 in the same periods. The biggest was the $17.7 billion purchase of insurer General Re Corp. in 1998.
There's no guarantee Buffett will make a larger deal soon,
even as potential targets become more affordable, Pabrai said.
Buffett has stressed the importance of buying companies with
management he can trust.
``Just being cheap isn't enough,'' Pabrai said. ``You need
seven moons to line up for Berkshire to act. We've probably got a couple more moons lined up without private equity in the
picture.'' |
