Buffett to buy PCC for $37.2bn
Deal adds to industrial focus
WARREN Buffett’s Berkshire Hathaway agreed to buy Precision Castparts Corporation (PCC), a maker of equipment for the aerospace and energy industries, in a deal valued at $37.2 billion (R472bn).
Buffett’s firm would pay $235 a share in cash, the companies said yesterday. That is 21 percent more than Friday’s closing price for PCC, which fell 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 $66bn at Berkshire as of June 30.
“This is a business that’s multi-decade in nature,” David Rolfe, who manages about $11bn at Wedgewood Partners, said of PCC.
“They have these incredibly long relationships with some of their customers. And people aren’t going to Fred’s moldings or Fred’s castings to get a little bit cheaper part on the inside of a jet engine.”
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 $2.6bn of pretax operating income on $10bn of revenue in its last fiscal year.
PCC said last month that it expected $10bn to $10.4bn 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 to the aerospace industry, with another 17 percent to the energy market. Its customers include General Electric, Boeing and Airbus.
“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.”
Berkshire said the deal was expected to be completed in the first quarter of next year, subject to regulatory approvals.
Berkshire would use about $23bn of its cash for the deal and borrow about $10bn, Buffett told CNBC.
He said he planned to hold off from megadeals for about a year, because the company needed to make sure it still had plenty of cash on hand.
Industrial giant
PCC pushes Berkshire further into heavy industry and cuts reliance on insurance and stock picking, growth engines for most of Buffett’s 50 years in charge. Today’s Berkshire, with large railroad and renewable energy holdings, could hardly have been imagined in the mid 1990s when the Buffalo News and shoe businesses were prominent units and the company was considered a mutual fund due to its equity holdings.
“Those days are gone,” Lawrence Cunningham, a professor at George Washington University and author of the book Berkshire Beyond Buffett, said in an interview. “It’s really an industrial operation now.”
Buffett has also shifted his equity portfolio, cutting back on some long-time holdings. Take the case of Procter & Gamble, the razor maker that has long been closely associated with the billionaire and was his third-largest position at the end of 2008. Last year, he struck a deal to trade most of the stock back to the company in exchange for its Duracell battery business.
‘Phase two’
Buying companies with enduring prospects was “a different sort of build-up of value” than investing in stocks, Buffett, Berkshire’s chairman and chief executive, told shareholders at his annual meeting last year. “We’ve moved into phase two.”
In 2010, Buffett spent $26.5bn in cash and stock for the portion of Burlington Northern Santa Fe (BNSF) that Berkshire did not already own, valuing the railroad at about $34bn. Berkshire also agreed to take on about $10bn of BNSF debt.
Jeff Matthews, an investor who has written books about Buffett, said it was unlikely the purchase of PCC would work out as well as the railroad.
“It’s night-and-day different from the BNSF acquisition,” which was announced at a time when there was widespread concern about the economy, he said.
“Today there are no bargains like that,” Matthews said, adding that he was thinking of selling his Berkshire stock.
“I just don’t feel comfortable spending that kind of dough on that kind of business in this kind of market.”
Berkshire class B shares slipped 1.4 percent to $141.60 in early trading at 8.06am in New York yesterday. The stock had dropped more than 4 percent this year by Friday’s close.
Buffett also backed the merger that created Kraft Heinz, and Berkshire said on Friday in its second-quarter report that results for the September quarter would probably include a pretax gain of about $7bn tied to the transaction.
Insurance operations have not fared as well lately, posting a net underwriting loss of $38m in the second quarter.
Buffett told shareholders in May that reinsurance had “turned for the worse”.
Buffett used the phrase “fabulous five” in 2012 to describe BNSF, the energy business, Iscar, Lubrizol and Marmon, which makes engineered wire, cables and motor-vehicle parts.
PCC would make the group “the spectacular six”, Cunningham said.
I have admired PCC for a long time. It is the supplier of choice for the world’s aerospace industry.