Buffett hunting another elephant – with $100bn available, who’s the target?

Working off a market capitalisation that now exceeds $400bn, Berkshire Hathaway chairman Warren Buffett keeps telling shareholders he needs to find new “elephants” to move the company’s dial. With a record $85bn in cash, the 86 year old is actively seeking his biggest trophy yet. His largest deal to date was the acquisition of Precision Castparts, the US aerospace components manufacturer, for $37.2bn. That was a big hop from Berkshire’s previous peak of $27bn paid in 2009 for railroad company Burlington Northern Santa Fe. Buffett will doubtless be peppered with questions about potential acquisitions at tomorrow’s Berkshire AGM – some pundits speculating that he could go as high as $100bn for the right target. Even were he to do so, it would only just make it into the Top 10 biggest deals ever – a list comfortably led by mobile phone company Vodafone’s $202bn takeover of its German rival Mannesmann in 1999. The piece below identifies some of the options Buffett could be looking at. – Alec Hogg

By Tara Lachapelle

(Bloomberg Gadfly) – Warren Buffett’s war chest is ready for his next deal – maybe even his biggest one yet.

The company’s cash swelled to $86.4 billion at the end of 2016, and at this rate it means even takeovers in the $100 billion ballpark are conceivable, as my colleague Noah Buhayar wrote for Bloomberg News this week (see article at the bottom of the page). He flagged Costco Wholesale Corp. and Nike Inc. as two such megasized possibilities. (Buffett may not strike you as the running-shoe type, but his face has graced pairs of Brooks, a brand owned by Berkshire.)

Warren Buffett

Buhayar’s piece reminded me that it’s a good time to dust off my screening of potential Berkshire acquisition candidates and lift the cap on deal size. Also, with the company’s annual meeting set to take place in Omaha, Nebraska this weekend, investors will get to pick Buffett’s brain on a variety of things including how he’ll spend Berkshire’s money. Here are the names my refreshed search spit out, plotted according to their returns on equity and balance sheet health (you can also see them in list form at the end of this article):

Why these companies specifically? Buffett used to detail his takeover criteria in his annual letter to shareholders but stopped doing so in 2015. Still, we can probably assume that it hasn’t changed much: large yet simple businesses that he can grasp, with consistent earning power, good returns on equity and little or no debt. My search excludes companies with market values under $20 billion and any banks and financial-service firms, defense contractors, technology makers, health-care providers and companies operating in the gambling, entertainment-media and advertising spaces, since realistically they’re less likely to appeal to Buffett.

He also prefers companies with very valuable brands that could be around forever, such as the consumer names he owns including Fruit of the Loom, as well as capital-intensive businesses with high returns, such as BNSF railroad. Buffett also has a taste for industrial-products makers with strong competitive advantages, such as Precision Castparts, the aerospace-parts maker he acquired last year.

Nike checks these boxes, as does chocolate maker Hershey Co., tractor maker Deere & Co., engine manufacturer Cummins Inc. and 3M Co., which these days sells everything from Scotch tape to electronic ankle monitors. They’re all iconic brands in their respective industries with strong, reasonably predictable profitability.

Costco didn’t make the list, and that’s because it typically earns only around 3 cents in operating profit for each dollar of sales, and I had weeded out companies with operating margins below 10 percent on a GAAP basis. That said, I certainly wouldn’t rule out the warehouse-club chain — strategically and financially it makes sense for Berkshire. Costco had 86,700,000 total cardholders at the end of fiscal 2016, and its member renewal rate was 90 percent in the U.S. and Canada. You could say it’s similar to the insurance float that Berkshire enjoys.

Three of the airlines that Berkshire built large stakes in during the past few months also have the hallmarks of Berkshire’s targets. There’s Delta Air Lines Inc. and United Continental Holdings Inc., of which Berkshire is the largest shareholder, and Southwest Airlines Co., where it has the second-biggest stake. Airlines have come such a long way since Buffett swore off the industry 16 years ago, United didn’t even have to drag him back.

Another interesting name that made the cut: PepsiCo Inc. I feel pretty confident in saying that Buffett — who got his start selling bottles of Coke door-to-door and is now Coca-Cola Co.’s largest investor — isn’t going to buy Pepsi. However, there has been speculation that Buffett and 3G Capital, which together control Kraft Heinz Co., could team up next on a three-way transaction involving Pepsi, Kraft and Anheuser-Busch InBev (another 3G company). I explained the idea and the caveats to it here last month.

Speaking of 3G, the private equity firm is expected to find another megadeal for Kraft Heinz soon, after early merger talks with consumer-products giant Unilever leaked to the press prematurely. Berkshire has so much cash that it can help bankroll Kraft’s next transaction, while also finding another large company for itself to bring in-house. Even with the minimum $20 billion cash cushion that Buffett likes to keep, there’s no shortage of funds for a 12-figure Berkshire deal. It could sell off equity holdings to raise money (cough, American Express Co.?), or take on debt, as it did to fund part of the Precision Castparts acquisition.

Based on the data, Buffett might take a call from any of these companies. But which one will call him up and name a price? We’ll just have to wait and see.

Buffett’s $86 billion cash pile has some dreaming of a huge deal

By Noah Buhayar

(Bloomberg) – Warren Buffett’s career is filled with splashy takeovers that cost billions – as in $10 billion or $20 billion or $30 billion.

But $100 billion? Even for Buffett, that’d be an awful lot of money. Yet, that is now the buzz among some investors, analysts and Buffett fans.

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., laughs while playing cards on the sidelines the Berkshire Hathaway annual shareholders meeting in Omaha, Nebraska, U.S., on Sunday, May 1, 2016. Photographer: Daniel Acker/Bloomberg

There are no signs that anything is on the immediate horizon, but they can’t resist fixating on the record amount of cash piling up at Buffett’s Berkshire Hathaway Inc. — conceivably enough to manage a transaction with a 12-figure price tag. That would put a takeover of, say, Nike Inc. or Costco Wholesale Corp. in range, to cite examples of companies that might appeal to Buffett’s tastes.

“A $100 billion deal seems possible” given the cash on hand, said Richard Cook, an investment manager in Birmingham, Alabama, whose fund holds Berkshire shares.

It’s a tantalizing proposition as thousands of investors prepare to gather this weekend for the company’s annual meeting in Omaha, Nebraska. Even at 86, Buffett is eager to show his fans that he’s far from done building his empire — and that he can top his largest takeover, the $34 billion purchase of railroad Burlington Northern Santa Fe in 2010.

Most of all, Buffett wants to own companies with strong competitive advantages that have earnings he can predict far into the future. That’s why firms like Nike or Costco might theoretically appeal, assuming prices are attractive. To be sure, neither has indicated it’s actually for sale — or that it would play along if a deep-pocketed buyer makes a bid.

Buffett certainly has the war chest to do so. At the end of December, Berkshire had $86.4 billion in cash, earning barely anything. That could balloon to $100 billion by mid-year as profits roll in from its dozens of subsidiaries, like auto insurer Geico and BNSF, said Jim Shanahan, an analyst at Edward Jones. And even though Buffett prefers to set aside at least $20 billion for a rainy day, it’s still “a lot of cash to be sitting on,” Shanahan said. Buffett didn’t immediately return a message seeking comment.

Investment Sales

The billionaire has plenty of other pockets to dig into, as well. He’s indicated he could sell portions of Berkshire’s stock portfolio to fund a deal. Some of those investments, including a $13 billion holding in International Business Machines Corp., could be liquidated without incurring much of a tax bill.

Then there’s debt. Buffett borrowed almost a third of the sum required for last year’s $33 billion deal for manufacturer Precision Castparts Corp. With interest rates so low, that could be a particularly attractive option.

Warren Buffett (R) talks with Mark Donegan, CEO of Precision Castparts, at the Precision Castparts booth in exhibit hall during the Berkshire Hathaway Annual Shareholders Meeting at the CenturyLink Center in Omaha, Nebraska, U.S. April 30, 2016. REUTERS/Ryan Henriksen

A large deal could also be partially funded using Berkshire’s own stock, though Buffett is reluctant to dilute his shareholders. (He recently quipped he’d “rather prep for a colonoscopy than issue Berkshire shares.”)

What’s possible is not necessarily probable, of course. For starters, there aren’t that many companies that are worth $100 billion and fewer still that might interest Buffett. He’s said, for instance, that he wouldn’t want to own a bank because of the regulation that would come along with it.

Another thing can be pretty much counted out: a hostile bid. He has said he doesn’t chase deals. He recently pulled an offer with Kraft Heinz Co. for Unilever — which has a market capitalisation of roughly $150 billion — because the consumer products giant deemed it unfriendly.

“If he were given an interesting opportunity to spend $100 billion, he’d find the money,” said Steve Wallman, a longtime Berkshire shareholder and investor in Middleton, Wisconsin. “The more important factor is what’s available.”

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