Buffett (and Sir John) on the prowl:
Buffett Searches for Bargains
Among Distressed Companies
By KEVIN HELLIKER, AMY MERRICK and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
A bear market. Countless companies on the ropes. "For Sale" signs draped across
once-prized assets.
It doesn't get much better than this, at least for Warren Buffett.
The investor who crafted a spectacular conglomerate out of the detritus of less-savvy
investors' dreams is building again, this time via recent investments in energy and
telecommunications companies. Just Thursday, his Berskhire Hathaway Inc., along
with two financial institutions, agreed to provide nearly $2 billion in financing for
struggling energy concern Williams Cos.
The depth of the distress in those industries combined with the depth of Mr. Buffett's
resources lead some investors and others to wonder whether grander strikes lie
ahead. His recent moves have included a $100 million investment this month in
telecom provider Level 3 Communications Inc., as well as the purchase of two gas
pipelines: Kern River Gas Transmission Co. for $450 million from Williams in March,
and just this week an agreement to buy the Northern Natural Gas pipeline from
Dynegy Inc., of Houston, for $928 million plus the assumption of $950 million in
debt.
In a telephone interview from Berkshire's Omaha, Neb., headquarters, Mr. Buffett
said that these purchases don't represent the first step of a larger strategy. In the case
of the gas pipelines, he said he didn't conduct any deep or broad study of the
industry.
"Why these pipelines? It's a question of what's available," Mr. Buffett said. "We didn't
look at the whole group and select two."
Other notable investors also are
shopping for bargains. Liberty Media
Corp., the cable company controlled by
John Malone, has been snapping up
distressed European assets, just Thursday agreeing to buy Dutch cable-operator
Casema NV from France Telecom SA for €750 million ($733.1 million).
Mr. Buffett says he can't predict what will come next for him because he takes --
rather than makes -- deal-related calls. But he certainly doesn't rule anything out.
"If I got a call this afternoon and somebody offered me A, B or C -- securities, assets
or a business -- and it looked like a good idea, we could sign up a deal tonight," he
said. "We move fast, and we always have cash."
Meanwhile, Mr. Buffett shrugs off concerns that some players in the energy and
telecom industries are facing regulatory investigations into possible wrongdoing.
"Assets are morally neutral," he said. "Nothing we've done would cause us a problem.
We didn't go in with people who caused the problem."
His moves already are influencing other investors. Although many came to doubt Mr.
Buffett during the go-go 1990s, when his aversion to highflying technology and
telecom stocks made Berkshire a laggard, now those investors wish they had shared
his skepticism. And once again, just a whiff of interest from him is enough to send a
particular stock or bond soaring.
When Berkshire said in early July that it would invest in Level 3, the company's
shares soared nearly 51% on the day the investment was announced. The shares have
more than doubled since initial word of the deal. Berkshire's investment of $100
million in the deal was part of a larger group's $500 million investment.
"Five hundred million doesn't change the outcome at Level 3, but people have a great
sense of confidence now that he's involved," says David Feinman, a managing
director at Societe Generale in Greenwich, Conn. "It's the Buffett effect."
As a bargain hunter, Mr. Buffett has limited competition at the moment. All kinds of
companies are trading at a fraction of their peak values, and many are fighting for
their lives. U.S. companies are defaulting on their debt at a near-record pace, and
banks increasingly are reluctant to extend new loans. About $155 billion of debt has
sunk from investment-grade rated to junk so far this year.
But there are hardly enough investors to soak up this supply, said many analysts.
Concedes Mr. Buffett: "We're known to have a lot of liquidity, when liquidity is
scarce in the overall market."
Bottom fishing is a risky venture, and Mr. Buffett isn't immune to setbacks. As a
result of financing a plan to bring Finova Group Inc., a commercial lender, out of
bankruptcy last year, Berkshire now owns half of the equity of a company whose
stock has been delisted.
Mr. Buffett, 71 years old, operates with a very small headquarters staff and reviews
every deal himself, along with Berkshire Vice Chairman Charlie Munger, who lives in
Los Angeles. The less he understands a business, Mr. Buffett said, the more
importance he places on the quality of its management. The chairman of Level 3, Walter Scott Jr., is a member of
Berkshire's board.
During the height of the tech boom, Mr. Buffett was ridiculed for avoiding the stocks of those companies, whose
performances he said he couldn't predict. In 1999, the value of Berkshire's equity portfolio declined 1%, and Berkshire's
corporate performance (measured in book value) relative to the S&P 500 index was the worst in Mr. Buffett's 35-year
tenure.
But the bursting of the tech bubble changed everything. In the past five years, Berkshire shares have risen 47%, while
the S&P 500 declined 6.6%. So far this year, Berkshire shares have declined 8%, while the S&P has dropped 23%.
So what's his next move? In each of the past two years, Berkshire has made multiple acquisitions, spending each year
between $5 billion and $11 billion, including the assumption of debt. This year, the bear market and devastation of the
telecom and energy industries suggest the possibility of something larger.
"The chances of doing transactions that are individually larger -- $2 billion, $5 billion, $10 billion deals -- are going up in
this environment," says Alice Schroeder, who covers Berkshire Hathaway for Morgan Stanley.
In this year's letter to shareholders, Mr. Buffett himself expressed a desire for acquisitions large enough to make an
impact at a company that last year had revenue of $37.67 billion. "We need 'elephants' to make significant gains now --
and they are hard to find," he wrote. |
