In biggest deal for Buffett, Berkshire Hathaway buying aerospace company for US$32b
Warren Buffett is making the biggest bet of his long investment career: a US$32.36 billion buyout of Precision Castparts in a deal that will continue to reshape his Berkshire Hathaway conglomerate.
The acquisition of the aerospace and industrial company would top Buffett's US$26.7 billion deal for BNSF railroad in 2010. It also follows several huge deals outside of the core insurance companies Buffett built his investment empire, including manufacturers, railroads, utilities and food companies.
Berkshire said Monday that it will pay US$235 per share in cash for Precision Castparts' outstanding stock. The deal is valued at about US$37.2 billion, including debt.
Buffett searches for deals of this size to meaningfully improve profits at Berkshire and invest the company's US$66.6 billion cash it had on hand. The universe of big companies that fit Buffett's criteria tend to be manufacturing or industrial firms.
And the 85-year-old Buffett wants to give Berkshire the strongest foundation possible for his investors and whoever eventually succeeds him.
"I think he's setting things up for the future and he doesn't want anything terribly risky," said Andy Kilpatrick, the investor who wrote Of Permanent Value: The Story of Warren Buffett.
Precision Castparts, based in Portland, Oregon, has been hit hard by tumbling crude and natural gas prices, but it appears to have strong long-term prospects. Buffet told CNBC that he would have bought the company even if he knew that commodities were in the midst of a multiyear slump.
"We're going to be in this business for 100 years, so it doesn't really make any difference what oil and gas does in the next year," said Buffett, whose company already held 4.2 million shares, or about three per cent of Precision Castparts' stock.
George Morgan, a finance professor at the University of Nebraska at Omaha and a former investment adviser, said Buffett's field of possible investments is limited because of the size he is looking for today.
Author and investor Jeff Matthews, who wrote Warren Buffett's Successor: Who It Is and Why It Matters, said he doesn't think Berkshire is getting a good price on Precision Castparts, so he's not sure it will be good for shareholders, especially since Precision's business is tied to the airline industry.
"I'm not crazy about buying a cyclical business like this with the stock market at an all-time high," said Matthews, who also holds Berkshire stock.
But other analysts said the price appeared fair.
KBW analyst Meyer Shields said Precision Castparts Corp may be a cyclical business, but Berkshire already owns a number of those and doesn't mind uneven profits in the short term. Shields said Precision Castparts stock had traded as high as US$280 in recent years.
"From the Berkshire perspective, they're getting a good company on sale," Shields said.
Precision Castparts will keep its name and will remain in Portland.
The boards of Precision Castparts and Berkshire Hathaway Inc unanimously approved the transaction, which is expected to close in the first quarter of next year.