Buffett buys a mini-me
The legendary investor has snapped up a smaller version of his own sprawling conglomerate. Matthew Partridge reports
Warren Buffett has drawn upon Berkshire Hathaway’s “vast cash pile” to buy the insurance company Alleghany for $11.6bn, says Callum Jones in The Times. Berkshire has offered a 25% premium to where Alleghany’s shares closed on Friday, in what would be the conglomerate’s biggest acquisition since 2016, when it acquired Precision Castparts for $37.2bn. Alleghany will join Berkshire’s “sprawling” stable of operating businesses, “ranging from the Dairy Queen icecream parlour chain to the rail transport company BNSF”, alongside an investment portfolio that includes huge stakes in Apple and Coca-Cola.
The deal “couldn’t be more Buffett”, says John Foley on Breakingviews. Alleghany “is basically a Berkshire mini-me both in its culture and strategy”. Chief executive Joe Brandon used to run one of Buffett’s reinsurance subsidiaries, while his predecessor “spent nearly two decades consciously building Alleghany into a Berkshirelike edifice” that “lets its businesses run independently” and “focuses on book value per share as its measure of value”. The only difference is that Alleghany is cheaper: the price represents a multiple of around 1.25 times book value at the end of 2021, compared with Berkshire’s 1.5 times.
Smaller… but less successful
Its true that Alleghany follows the Buffett playbook of using some of its policyholders’ money to buy companies outright, says Lex in the Financial Times. Still, it’s been less successful than Berkshire at increasing book value, with the pace of growth slowing in recent years. On the insurance side, recent results “have not been stellar” – it has “recorded underwriting losses arising from the pandemic and elevated natural disasters”. It’s also hard to see what Buffett will be able to do with the pool of “nearly cost-free capital” provided by the ongoing contributions from Alleghany’s policyholders, given that “Berkshire’s railroad, power utilities and energy business generated $9.5bn in operating profits”.
Whatever the merits of the move, it looks like Buffett is returning to the dealmaking that he has “shied away from in recent years”, says Katherine Chiglinsky on Bloomberg. Berkshire is not short of money – it has almost $150bn on hand – but high valuations have meant that Buffett has struggled to find opportunities that he considers attractive. As a result, he had turned to buying back Berkshire’s stock – a capital-deployment move he “largely shunned” for decades.
The Alleghany deal comes a week after Berkshire announced that it had increased its stake in Occidental Petroleum to nearly 15%, up from 9%, says Paul La Monica on CNN. The investment “adds to Berkshire’s already significant position in the energy industry”, which includes “leading electric utilities such as PacifiCorp and MidAmerican Energy, oil and natural gas pipelines, and several renewable power companies”. Occidental’s shares have done very well from the spike in oil prices, nearly doubling since the start of this year.