Berk­shire to buy Pre­ci­sion Cast­parts for $37 bil­lion

The Pak Banker - - COMPANIES/BOSS -

War­ren Buf­fett's Berk­shire Hath­away Inc. agreed to buy Pre­ci­sion Cast­parts Corp., the maker of equip­ment for the aerospace and energy in­dus­tries, in a deal val­ued at $37.2 bil­lion.

Buf­fett's firm will pay $235 a share in cash, and take on Pre­ci­sion Cast­parts' net debt, the com­pa­nies said Mon­day in a state­ment. That's 21 per­cent more than Fri­day's clos­ing price for the Port­land, Ore­gon-based com­pany, which had dropped 17 per­cent in 12 months amid the slump in energy prices.

The deal is one of the largest by Buf­fett, who has been build­ing his Omaha, Ne­braska-based firm in re­cent years with the ac­qui­si­tion of in­dus­trial com­pa­nies such as Is­car Me­tal­work­ing in 2006 and chem­i­cal maker Lubri­zol in 2011. It will also help work down a cash pile that climbed to more than $66 bil­lion at Berk­shire as of June 30.

"I've ad­mired PCC's op­er­a­tion for a long time," Buf­fett said in the state­ment. "It is the sup­plier of choice for the world's aerospace in­dus­try, one of the largest sources of Amer­i­can ex­ports."

The tar­get com­pany uses ad­vanced en­gi­neer­ing tech­nol­ogy to make me­tal in­dus­trial com­po­nents for jet en­gines and power plants as well as pipes for the oil and gas in­dus­try. It em­ploys about 30,000 peo­ple and pro­duced $2.6 bil­lion of pre­tax op­er­at­ing in­come on $10 bil­lion of rev­enue in its last fis­cal year.

Pre­ci­sion Cast­parts said in July that it ex­pects $10 bil­lion to $10.4 bil­lion of sales and an op­er­at­ing mar­gin of about 27 per­cent in its cur­rent fis­cal year, which ends in March. Last year, 70 per­cent of its sales were made to the aerospace in­dus­try, with another 17 per­cent go­ing to the energy mar­ket. The com­pany's cus­tomers in­clude Gen­eral Elec­tric Co., Boe­ing Co. and Air­bus Group SE.

In 2010, Buf­fett spent $26.5 bil­lion in cash and stock for the por­tion of Burling­ton North­ern Santa Fe that Berk­shire didn't al­ready own, valu­ing the rail­road at about $34 bil­lion. Berk­shire also agreed to take on about $10 bil­lion of BNSF debt.

Buf­fett doesn't pay a div­i­dend and rarely re­pur­chases shares, mean­ing he may have to pur­sue more megadeals, said Meyer Shields, an an­a­lyst at Keefe Bruyette & Woods.

"This is go­ing to be a re­cur­ring phe­nom­e­non where the busi­nesses in the ag­gre­gate are spin­ning off so much cash that you can go out and buy another busi­ness," Shields said be­fore Mon­day's deal was an­nounced.

Mean­while, War­ren Buf­fett's even­tual suc­ces­sor at Berk­shire Hath­away Inc. will have one more in­dus­trial com­pany to su­per­vise, and a lot less cash to worry about, if the bil­lion­aire pulls off a deal for Pre­ci­sion Cast­parts Corp.

That's the sort of trade-off that the 84-year-old may be look­ing for as he pre­pares his com­pany for a new gen­er­a­tion of lead­er­ship and seeks to shrink a cash pile that stood at $66.6 bil­lion on June 30. Berk­shire is in talks to buy Pre­ci­sion Cast­parts, which had a mar­ket value of more than $26 bil­lion at Fri­day's close, ac­cord­ing to a per­son fa­mil­iar with the mat­ter.

For the suc­ces­sor, a smaller cash hoard "cer­tainly would give him or her time to fo­cus on in­te­grat­ing and im­prov­ing the oper­a­tions of ex­ist­ing port­fo­lio com­pa­nies, with­out any pres­sure to make ac­qui­si­tions any time soon," Jim Shana­han, an an­a­lyst at Ed­ward Jones, said in a phone in­ter­view. "Berk­shire gen­er­ates a lot of cap­i­tal and they have a hard time find­ing op­por­tu­ni­ties to put it to work."

Adding Pre­ci­sion Cast­parts and its 30,000 work­ers would con­tinue Buf­fett's trans­for­ma­tion of Berk­shire to an in­dus­trial con­glom­er­ate with less re­liance on rein­sur­ance and stock pick­ing. That also means his suc­ces­sor will need to be adept at buy­ing and man­ag­ing large com­pa­nies.

Buf­fett has said Berk­shire has a can­di­date ready to re­place him as chief ex­ec­u­tive of­fi­cer if needed, though he's never pub­licly iden­ti­fied the per­son. Vice Chair­man Charles Munger has dubbed two man­agers, energy chief Greg Abel and Ajit Jain, the head of Berk­shire's name­sake rein­sur­ance op­er­a­tion, as "world-lead­ing" ex­ec­u­tives, stok­ing spec­u­la­tion that one of the two could take over.

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