Buffet's love of Disney . . one of his worst deals in 1966 turned out to be one of his best deals of the 90's.
Buffet in helping to finance the Capital Cities acquisition of ABC was able to also get a 25% interest in the deal. It looks like by taking his payment in all Disney's stock, he not only prevented paying substantial capital gains tax, he was able to obtain cheap Disney stock that eventually turned out to be one of his best investments in the 90's.
In 1979, Berkshire began to acquire stock in ABC. Capital Cities announced a $3.5 billion purchase of ABC on March 18, 1985 surprising the media industry, as ABC was four times bigger than Capital Cities at the time. Buffett helped finance the deal in return for a 25% stake in the combined company.[29] The newly merged company, known as Capital Cities/ABC (or CapCities/ABC), was forced to sell some stations due to FCC ownership rules. The two companies also owned several radio stations in the same markets.[30]
The DIS Capital Cities/ABC deal closed in 1995
Berkshire’s 20 million shares of Cap Cites fetched a pre-tax return in the neighborhood of $2.1 billion. Buffett took his payment in all Disney stock rather than cash, showing his and Berkshire’s confidence in Disney.
This was another one of his "tax-free" exchanges that allowed his capital to keep on growing w/i another excellent company Disney.
FWIW early in 1966, Buffet's first large investment was a 5% position in Disney.
In 1966, the entire Disney company was selling for $80 million and had a debt-freebalance sheet. Warren Buffett spotted this. He went out to Southern California and met with the Kansas City boy who ran the place, Walt Disney. Disney showed him around the property and talked about the newest attraction they were installing, the Pirates of the Caribbean, which cost $17 million. A stockholder was essentially getting much of the empire (sans that held in WED Enterprises), copyrights and all, for the price of a handful of rides. The reason Wall Street had no interest in the company was that it was earning a lot of money from Mary Poppins but there was nothing in development pipelines so income was bound to fall. Convinced there was something there, and satisfied with the economics, Warren pulled the trigger. He used $4 million of his partnership capital to buy a 5% ownership stake. His thinking was that the firm had 200+ films in the vault that could be brought out over and over for future profits, they had 300 acres in Orange county where the Anaheim park attracted 9 million customers a year, there was a brilliant executive at the helm who had a lot of his own money invested in the place; a good recipe when combined with a dirt cheap price and a huge margin of safety. A year later, Buffett sold the stake for $6 million. At the time, he felt good about it. In his mid-to-late 30’s, he’d made his partners the inflation-adjusted equivalent of $14.1 million in roughly twelve months with a single decision. However, in retrospect, it was one of the worst mistakes of his long and illustrious career. -------------------------------------------------------
So 30 years later, he was able to finally do his Disney deal. This time it was one of the largest acquisitions at the time and he went all in. It worked out extremely well for him.
Lesson learned: Always keep a few shares to hold long term if you like the company and there is a good management team. Make sure the balance sheet is relatively debt free and there is a consistent stream of future cash flows that can be generated from hidden assets (ie intellectual property, oil in the ground, or a strong 'brand').
Just be sure to buy the assets at the right price.
Charlie Munger, refers to Disney as an oil company that pumps money out of the ground, then puts it back for a generation to return to it when the time is right. The trick is to make sure you aren’t overpaying for the stock. Write the check when the price is too high and it’s like buying a steamship stuck in a swamp. It can take a lot of years for the underlying profits to catch up to the acquisition cost while you sit there mired in the muck.
EKS |
