Category Archives: Commentary

Commentary: It’s All in the Cards Monday for Berkshire’s Oncor Bid

(BRK.A), (BRK.B)

Monday’s hearing before Judge Christopher Sontchi in U.S. Bankruptcy Court in Delaware, could decide the fate of Berkshire Hathaway’s $9 billion bid for Oncor Electric Delivery. It’s the latest round of a high stakes poker game that has seen all the players trying to strengthen their hands.

For Berkshire, the key to whether it wins the right to acquire the utility may not just be whether Warren Buffett can prevail over Paul Singer’s Elliot Management, but also the judge’s response to a third bid offering $9.45 billion, which is said to be coming from Sempra Energy of San Diego.

Paul Singer and Elliot Management’s strong hand comes from its status as the largest owner of every class of impaired debt. The hedge fund recently purchased $60 million of leveraged buyout notes to cement that status. And, while Singer has talked of putting together a bid to top Buffett’s offer, he could just as well side with Sempra’s offer.

Another Player Comes to the Table

Sempra Energy could have a strong hand of its own, as it is a credible bidder. Sempra was created in 1998 by a merger of parent companies of two long-established, and highly respected, investor-owned utilities — Los Angeles-based Pacific Enterprises, the parent company of Southern California Gas Co., and Enova Corporation, the parent company of San Diego Gas & Electric by a merger of parent companies of two long-established, and highly respected, investor-owned utilities — Los Angeles-based Pacific Enterprises, the parent company of Southern California Gas Co., and Enova Corporation, the parent company of San Diego Gas & Electric. Today it has 16,000 employees and serves 32 million customers worldwide.

Is the Key the Support of the Stakeholders?

Berkshire’s aces come from an approach that has focused on lining up support from the stakeholders that receive power from Oncor. Five key Texas stakeholder groups have all endorsed Berkshire’s bid.

On Friday, Berkshire Hathaway Energy announced that the Staff of the Public Utility Commission of Texas, Office of Public Utility Counsel, Steering Committee of Cities Served by Oncor, the Texas Industrial Energy Consumers and the IBEW Local 69 have entered into a settlement agreement with Berkshire Hathaway Energy.

The agreement resolved all issues in Berkshire Hathaway Energy’s acquisition of Oncor.

By entering into the settlement, the parties agreed that the acquisition is in the public interest, meets the statutory standards and will bring substantial benefits to Oncor and its customers. The parties to the agreement ask the Public Utility Commission of Texas to approve the acquisition consistent with the enhanced commitments in the agreement.

Will Berkshire Raise its Offer?

Both Greg Abel, Berkshire Hathaway Energy chairman and CEO, and Warren Buffett, have stated the company will stand firm on its $9 billion offer to acquire 80% of Oncor and will not be increasing its offer. Berkshire will collect a $270 termination fee if its offer is rejected.

Berkshire is hoping that in the end Judge Sontchi is persuaded by the support of 12 key stakeholder groups across Texas for Berkshire’s bid.

“The strong coalition of stakeholders consistently express the appropriate concerns and necessary protections for Oncor and its customers,” said Abel. “We stand ready to deliver on and exceed the regulatory commitments

In any case, Monday is looking like the decisive day in the fate of Oncor. Like a poker game of Texas Hold ‘Em, all the cards will be on the table.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Familiar Territory, Berkshire Wins if it Loses

(BRK.A), (BRK.B)

Warren Buffett and Berkshire Hathaway look to be on the verge of winning Oncor Electric Delivery Co., a Texas-sized prize it has been chasing for the last three years, as the utility struggled under bankruptcy proceedings.

Now, all that stands in its way is a last minute bid by Paul Singer and his hedge fund Elliot Management. The hedge fund is the largest creditor in Oncor’s parent company, Energy Future Holdings Corporation.

Singer scored a recent success when Elliot Management won a delay in finalizing Berkshire’s takeover while it puts together its own offer, reportedly a $9.3 billion bid that would top Berkshire’s $9 billion deal.

The delay moves the bankruptcy court date from August 10 to August 21.

In addition to winning approval from the bankruptcy judge, any deal put together by Berkshire Hathaway or Elliott Management has to pass muster with the Public Utility Commission of Texas (PUC), the agency that regulates the state’s electric and telecommunication utilities, and must rule that any approved acquisition is in the public interest.

The PUC has already rejected two prior takeover bids for Oncor, including last year’s bid from Hunt Consolidated Inc., and April’s bid from NextEra Energy Inc. The failed deals opened the door for Berkshire’s bid.

Berkshire, which entered the energy business in 1999, has built one of the largest utility holding companies, with $85 billion in assets and $17.4 billion in annual operation revenue, as of 2016.

Unlike many failed attempts at merging utilities, Berkshire has repeatedly acquired plum assets, including MidAmerican Energy, PacifiCorp, and NV Energy, and by allowing them to retain their earnings, made them stronger than they were before acquisition.

This is not something that escapes the PUC as it considers who should supply power to 10 million Texas residents, and a host of major manufacturers that need electricity at the lowest possible rates.

As Tony Bennett, president of the Association of Texas Manufacturers, pointed out in a recent editorial, Texas companies in the Oncor service area don’t have a choice of electricity suppliers, so whoever wins the bid has to be focussed on reliable service and low rates, not just the highest return for investors. This is where Berkshire Hathaway Energy excels.

Still, like so many deals that Buffett strikes, he wins even if he loses.

What’s a Hundred or Two Million Between Friends?

Termination fees are familiar territory for Buffett, who walked away with $175 million in 2008 when he refused to get in a bidding war for Constellation Energy. French energy company EDF doubled his offer, but a pile of cash that ran into the hundred millions suited him just fine for his three month pursuit of the Baltimore-based energy wholesaler.

This time, if the Oncor deal falls through, Berkshire will receive a $270 million termination fee.

Not a bad way to lose at all.

But, I wouldn’t bet on Berkshire losing this one.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Did the KCC Open the Door for Berkshire to Make a Bid for Westar Energy?

(BRK.A), (BRK.B)

On April 19, the Kansas Corporation Commission torpedoed the planned acquisition of Westar Energy by Great Plains Energy.

Westar is the largest electric utility in Kansas and the combined companies would have served approximately 950,000 Kansas customers.

The KCC rejected the merger as bad for consumers, and noted what they called an excessive purchase price, requiring GPE to take on significant debt. They noted that the $4.9 billion acquisition premium exceeded GPE’s $4.8 billion market capitalization by $100 million.

With the merger dead, the big question is whether it opens the door for Berkshire Hathaway Energy to make another run at Westar Energy. BHE was in the running the last time around.

Westar Energy is a Natural Fit for Berkshire

With a market cap of roughly $7 billion, Westar is in the same price range as NV Energy, which Berkshire acquired in December 2013 for $5.6 billion.

In addition to just adding to Berkshire’s energy assets, the acquisition makes sense geographically. BHE has already partnered with Westar on Prairie Wind Transmission, LLC, a 108-mile, 345-kilovolt high-capacity electrical transmission line in south-central Kansas that was completed in 2014.

If BHE proves to be interested, it may face competing bids from Ameren Corporation, as well as an investor consortium that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board.

Both Ameren and the CPPIB were interested in Westar before the Great Plains merger was signed, and they may again return to the bidding.

Like BHE, Ameren’s service area in neighboring Missouri also fits well with Westar, which provides power for approximately 687,000 customers in much of east and east-central Kansas.

Unlike Great Plains Energy, BHE’s financial strength may enable it to overcome the KCC’s concerns, and add another valuable energy asset to Berkshire’s portfolio.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Could Pepsi become a Berkshire Brand?

(BRK.A), (BRK.B)

It‘s no secret that Warren Buffett is partial to Coca-Cola, after all he not only drinks 5 Cokes a day, but Berkshire Hathaway owns 400 million shares of Coca-Cola stock valued at roughly $16.5 billion.

“I’m one quarter Coca-Cola,” Warren Buffett has joked.

However, with Berkshire and 3G Capital having been rebuffed in their $143 billion bid for Unilever Plc, one important analyst thinks PepsiCo, Inc. might be a logical target for the expansion of Kraft Heinz.

Pablo Zuanic, the Senior Analyst covering the Food, Beverage, and Household/Personal Care sectors for Susquehanna Financial Group, thinks Pepsi might quench Berkshire and 3G’s thirst for acquisitions.

Zuanic’s bona fides as an analyst have seen him recognized by Institutional Investor as the #1 Latin American Food & Beverage analyst for two consecutive years, the #4 US Food Analyst, and the #3 US Food Analyst in their Alpha Poll of Hedge Funds.

PepsiCo, Inc., which has a market capitalization of almost $161 billion, not only has one of the most popular soft drink brands in the world, but also owns snack-maker Frito-Lay and juice company Tropicana.

Zuanic recently raised his Pepsi price target from $118 to $132 on speculation that Kraft Heinz could team with Anheuser-Busch for the bid. The stock is currently just over $112 a share.

It seems logical that a bid for PepsiCo would see the beverages added to Anheuser-Busch, and the snack foods added to Kraft Heinz.

Zuanic notes that in his opinion Pepsi shares trade at a substantial discount when compared to Coca-Cola.

“PEP shares have lost visibility and now trade at a 25% discount to KO on apples-to-apples comps.” writes Zuanic.

While a Berkshire and 3G Capital bid for Pepsi might be a possibility, don’t expect to hear Buffett say “I’m one quarter Pepsi,” anytime soon.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Not All Rotten Apples for Berkshire in Nevada

(BRK.A), (BRK.B)

There’s no doubt that the last few years have been a surprisingly rough time for Berkshire Hathaway’s NV Energy in Nevada.

One the one front, it has been in a battle with the roof-top solar industry over the hearts, minds, and wallets of retail customers.

On the other front has been the casino industry and its push for cheaper commercial power for its ubiquitous neon and blazing light bulbs.

Losing customers is not the path to grow a business, and when in October 2016 both MGM Resorts and Wynn Resorts paid tens of millions to exit the NV Energy power grid, it looked like the shiny red apple of NV Energy that Berkshire acquired for $5.6 billion in cash in 2013 might have a few worms in it.

So, it’s nice to get some good news that Berkshire has signed a major customer to a new solar power agreement. And that customer is a high-profile customer, Apple.

NV Energy and Apple reached an agreement in January to build 200 megawatts of additional solar energy in Nevada by early 2019.

The projects will support Apple’s renewable energy needs for its Reno data center.

NV Energy is filing an application with the Public Utilities Commission of Nevada (PUCN) to enter into a power purchase agreement (PPA) for the solar power plant. The project will bring NV Energy’s total to more than 529 megawatts of new solar resources in construction in Nevada or under review for approval.

This is in addition to the 491 megawatts of universal solar resources in Nevada currently serving NV Energy customers. Apple will also dedicate up to 5 megawatts of power to NV Energy’s future subscription solar program for residential and commercial customers.

“We are proud to play a role in helping Apple meet their energy needs with Nevada’s abundant solar resource,” said Paul Caudill, president and CEO of NV Energy. “In partnership with our customers, we continue to develop a more balanced fuel mix in a way that benefits the local economy by providing hundreds of jobs for Nevadans, particularly those in the International Brotherhood of Electrical Workers local 357 and 396, and advances the state’s policy goals.”

“Investing in innovative clean energy sources is vital to Apple’s commitment to reaching, and maintaining, 100 percent renewable energy across all our operations,” said Apple’s vice president for environment, policy and social initiatives Lisa Jackson. “Our partnership with NV Energy helps assure our customers their iMessages, FaceTime video chats and Siri inquiries are powered by clean energy, and supports efforts to offer the choice of green energy to Nevada residents and businesses.”

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Warren Buffett Keeps Getting Valentines from Phillips 66

(BRK.A), (BRK.B)

“How do I love thee? Let me count the ways,” wrote poet Elizabeth Barrett Browning. The same could be said by Warren Buffet when it comes to an energy sector company that is clearly dear to his heart.

If there is one company in the oil and gas sector that Warren Buffett especially loves, it is Houston-based Phillips 66, an energy manufacturing and logistics company with a portfolio of integrated businesses: Midstream, Chemicals, Refining, and Marketing and Specialties.

Back in early 2014, Berkshire swapped a large portion of its previous Phillips 66 position for the company’s chemical business unit, which was added to Berkshire’s specialty chemical maker Lubrizol.

“We were able to do that on a tax-advantage basis. We didn’t trade them because we didn’t like the stock,” Warren Buffett said at the time on CNBC’s Squawk Alley.

“I had always intended on coming back in, assuming that the price was right.”

By mid-2015, Buffett was back in and Berkshire revealed that it had accumulated 58 million shares of stock.

That position Has Only Grown

Buffett’s love of Phillips 66 has continued unabated, as he added to the position throughout 2016.

As of its last filing, Berkshire Hathaway now owns $6.4 billion of Phillips 66 stock, which works out to around 15.67% of the company. Berkshire is the largest institutional owner.

Why does Buffett love Phillips 66?

First of all, the company’s diversified businesses make it a leader in refining (it owns 13 refineries), marketing (it sells fuel In the U.S. under the Phillips 66, Conoco and 76 brands), and Midstream operations. Its Midstream operations gathers, processes, transports and markets natural gas, and transports, fractionates and markets natural gas liquids in the United States. Phillips 66 also manufactures and markets petrochemicals and plastics worldwide.

Phillips 66’s diversified businesses has given it relative stability in the face of recent slumps on crude oil prices, and the stock remained strong between 2014 and 2017.

With a current dividend yield of 3.22%, the stock has been pouring cash into Berkshire, much of it through positions held by its insurance company National Indemnity.

Rising Dividends

Buffett’s love of Phillips 66 is likely to continue. Back in 2015, the company’s dividend yielded between 1.9% and 2.7%. With most of the quarters paying dividends of 56 cents a share. Since May 2016, the dividends have moved up and it has paid 63 cents a quarter for the past four quarters.

A strong stock price and a fat dividend. What’s Warren Buffett not to love?

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Should Berkshire Pay a Dividend?

(BRK.A), (BRK.B)

Like the sparrows returning to Capistrano, or geese flying south for the winter, some things are annual events. Such, is the case with the seemingly annual articles calling for Berkshire Hathaway to pay a dividend or do share buybacks. After all, Berkshire builds up free cash at the rate of roughly $1.5 billion a month, and Omaha being the small place that it is must be running out of places to put it.

It’s a situation that just seems to be getting bigger and bigger, and it has been for decades.

In 2007, Buffett plunked down $4 billion to buy 60% of the holding company the Marmon Group from the Pritzker family.  At the time, Berkshire was sitting on a record $40 billion in cash, and the purchase of Marmon’s 63 companies was a good use of some of that money as it greatly expanded the breadth of Berkshire’s manufacturing companies.

Here we are a decade later and Berkshire has over twice the cash it had at that time despite having acquired much larger companies in the interim period, including BNSF Railway and Precision Castparts.

At times, Berkshire reminds me of the fairy tale “The Sorcerer’s Apprentice,” where the magician’s apprentice cuts a broom in half only to find it turn into two brooms. Each broom he cuts becomes another pair of brooms until he is surrounded by brooms. While not every investment Berkshire has made has worked out, many of them have worked out so well that the cash used to purchased them has been returned to Berkshire and the acquired company then produces even more cash.

Currently, Berkshire is again sitting on over $91 billion in cash. Even deducting the $20 billion Warren Buffett likes to keep on hand in his rainy day fund for protection against recessions, great recessions, or great depressions, there is a lot of spare cash piling up, Surely, as some ask, they won’t miss $5 billion or so a year if they kick it out as a dividend?

Just this month, Bloomberg News published “The Case for a Berkshire Dividend,” which trod this familiar ground. In their defense, this is certainly one of the top questions I’m asked whenever I discuss Berkshire with anyone. “Don’t Berkshire shareholders deserve a dividend?” After all, the company has an ever growing cash hoard.

I will save the suspense and get right to my answer. In my opinion, shareholders may deserve it, but they should not want it.

Now that you have my answer, let’s look at why I say no.

Warren Buffett doesn’t like the idea

Going against the wisdom of the world’s greatest investor has been a losing strategy for decades, and in this case, Warren Buffett doesn’t believe a dividend is the right thing to do. When it comes to Berkshire, Buffett applies the same standard as he does with evaluating any other company, and looks at the “’what-will-they-do-with-the-money’ factor.” In Buffett’s view, Berkshire is better off holding on to cash in order to have it available not just for security in economic down times, but to make clever financing deals and to fund acquisitions big and small.

Buffett uses Berkshire’s cash to make the company better

If you liked the old Berkshire Hathaway you probably love the new and improved Berkshire. Over the last decade, Buffett has used Berkshire’s cash to acquire “elephants” such as BNSF Railway ($35 billion) and Precision Castparts ($37.2 billion), which have strengthened and diversified Berkshire’s earning power. He has also used the cash to purchase sizeable but smaller companies, such as the Van Tuyl Group auto dealerships ($4.1 billion), electric utility NV Energy ($5.6 billion), and Altalink ($2.9 billion). What’s more, Berkshire’s cash ($12.25 billion) enabled it to become the majority shareholder in Heinz, which through another mega-acquisition made Berkshire the largest shareholder in Kraft-Heinz.

In addition to all these large and medium-sized acquisitions, Berkshire has plenty of money for “bolt-on” acquisitions that strengthen its existing businesses. On average, Berkshire spends roughly $3 billion a year acquiring companies that its managers believe will strengthen their various businesses.

For example, in 2012, Berkshire’s McLane Company, a $33+ billion dollar supply chain services company that provides grocery and foodservice supply chain solutions for convenience stores, mass merchants, drug stores, and chain restaurants throughout the United States, acquired Meadowbrook Meat Company, one of the nation’s largest customized foodservice distributors for national restaurant chains. The acquisition boosted McLane’s revenues by roughly 20 percent.

Year after year, Berkshire’s stable of companies get stronger and own more market-share as Buffett allocates capital among the existing businesses.

Many of these acquisitions are small relative to Berkshire’s size but meaningful to growing Berkshire’s individual businesses. MiTek Industries, for example, acquired M&M Manufacturing in 2015, and three more companies, Sales Simplicity Software, Wrightsoft, and DIY Technologies in 2017.

Stock buybacks only make sense when the stock price is below its intrinsic value

As for stock buy backs, trading a dollar for anything less than a dollar doesn’t make a lot of sense. Still, many companies do it to satisfy investors hungry for short term boosts to stock prices, and quite frankly, to keep up with what has become Wall Street’s latest fad.

Warren Buffett noted in his 2011 letter to shareholders, “Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. We have witnessed many bouts of repurchasing that failed our second test.”

Dividends are a one size fits all solution seeking a problem

Don’t need cash? Well, you are getting it anyway. As Warren Buffett noted in his 2013 shareholder’s letter, “dividends impose a specific cash-out policy upon all shareholders.”  Rather than you deciding when to cash-out, the decision is made for you, whether you want it or not. This is like having a neighbor decide to sell a small parcel of land to finance his daughter’s wedding, and requiring you to do the same even though no one in your family is getting married.

Warren Buffett is a better investor than you are, way better

By letting Berkshire maximize the amount of cash it has available for investing, it is able to make deals that you can only dream about. Here is just one example. In 2014, Berkshire provided provided $3 billion in financing so that Burger King could acquire Canadian restaurant chain Tim Hortons. The deal gave Berkshire preferred stock paying a sweet 9% return on its money. In a low interest rate environment, 9% was a very nice return, beating at that time any CD you wanted to put your dividend check into. But wait, there’s more. Berkshire also received warrants enabling it to buy 8,438,225 common shares of the newly christened Restaurant Brands International for a penny a share. How has that $84,438 investment worked out? As of January 20, 2017, Berkshire’s $84,438 has turned into $410,182,117. Think you can do better?

What happens when Buffett is no longer at the helm?

Granted, it will be hard for any future CEO to match Buffett’s legendary mix of investing savvy, patience, and creativity, but wouldn’t you want the next Berkshire CEO to have the full resources available for investing that Buffett had? Why handicap future CEOs with less free cash to invest? Starting a dividend now, would only create a situation that Buffett’s successors would be unable to discontinue.

In Conclusion

Last, but not least, you have to ask yourself what you would do with the money you received from your dividend. If you have someplace better to invest it than in Berkshire then why didn’t you invest it there in the first place? Just look at 2016’s results. Berkshire’s stock rose 24.36% as compared to the S&P 500’s $11.24% increase. Money invested in Berkshire was the winning bet.

If you are a Berkshire Hathaway shareholder, you already own a portion of one the world’s strongest, most diversified companies. It’s a conglomerate that is managed by the most successful investor of all time.

Perhaps someday Berkshire will run out of elephants to acquire, or will not need to make bolt-on acquisitions that help its existing companies grow, but until that time, I want to leave my money invested right where it is.

© 2017 David Mazor

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Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

 

Commentary: Legalization of Marijuana Means “Gold Rush” for Berkshire Hathaway

(BRK.A), (BRK.B)

Marijuana may make its users relaxed and sluggish, but it will be a booming high time for one of Berkshire Hathaway’s companies.

Based in New Berlin, Wisconsin, Cubic Designs builds prefabricated custom mezzanine systems, standard steel platforms, pipe racks and canopies that add space to facilities.

It’s the kind of space that is needed for marijuana growing operations.

With California, Nevada, Arizona, Massachusetts and Maine all having just legalized the growing and sale of pot within their borders, Berkshire Hathaway’s Cubic Designs, a unit of MiTek, now has plenty of opportunities to market its wide variety of special platforms that maximize floor space in warehouses.

In addition, Arkansas, Florida, Montana, and North Dakota all just legalized the medical use of marijuana, which means that growing and distribution operations will begin in those states, as well.

For Cubic Designs, the marketing plan is ready and tested. When marijuana was legalized in Colorado, the company mailed fliers to marijuana dispensaries touting that they could double their growing space and improve their profits using Cubic Designs’ systems.

With the U.S. Cannabis Spot Index price currently at $1,393 per pound, as of November 4, 2016, maximizing growing and storage space can make millions of dollars of difference for a grower.

The New Gold Rush

Unlike most commodities that get grown in one region and shipped for sale in another, there is inherent duplication within the marijuana industry that benefits equipment suppliers. With marijuana still illegal on the Federal level, the harvested plants can’t cross interstate lines, so all the growing, processing and distribution operations need to be established separately in each state. These redundant operations offer business opportunities for establishing every phase of the infrastructure needed to support.

Much like the California Gold Rush in 1849 made big money for people supplying the panning equipment, this new “Marijuana Gold Rush” means lots of money to be made for equipment suppliers for growers and retailers.

With twenty-five percent of the U.S. population suddenly having access to legal marijuana, the growth opportunities for Cubic Designs will have a lot of upside ahead of it.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Is Now the Time for Kraft Heinz to Make a Play For Mondelez?

(BRK.A), (BRK.B)

When Berkshire Hathaway and 3G Capital put together Kraft Heinz in 2015, the talk in the street was all about whether adding Mondelez International would be the next step. After all, Mondelez used to be part of Kraft before it was spun-off in 2012.

At the time, Warren Buffett downplayed the idea, noting that the newly formed Kraft Heinz had much to do in order integrate the two companies.

“At Kraft Heinz, we have our work cut out for us for a couple of years,” Buffett told CNBC. “Frankly, most of the food companies sell at prices that it would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz.”

Is Now the Time?

Here we are a year later and the fate of Mondelez in the rapidly consolidating food industry is still not clear. The company just dropped its proposed takeover of chocolate king Hershey, and the question of whether it’s an acquirer or acquiree is back in play.

As far as size goes, Mondelez has a market cap of roughly $67 billion, as compared to Kraft Heinz’s $109 billion, and combined they would put Kraft Heinz ahead of Unilever, which has a market cap of $143.4 billion, and move it closer to Nestle, which has a market cap of over $246 billion.

Berkshire and 3G Capital

Warren Buffett has clearly been pleased with his dealings with Jorge Paulo Lemann, Alex Behring and Bernardo Hees of 3G Capital. Partnering with 3G has brought a tough, tight-fisted management style that seeks to ring inefficiencies out of large-scale legacy companies, and Berkshire has benefited by gaining equity and putting large chunks of cash to work financing the deals.

Much of Berkshire’s financing takes the form of preferred stock, which has paid high interest rates in a low interest rate world. It’s a deal that Buffett loves, and one that he also used to help shore up companies such as Bank of America, Goldman Sachs and Dow Chemical during the Great Recession.

However, the high interest dominoes have been falling one after another as companies became healthy enough to get cheaper financing.

Similarly, when Berkshire and 3G went in on Kraft Heinz in 2013, Berkshire received $8 billion in preferred shares that paid it $720 million annually. Those shares were redeemed this summer as Kraft Heinz moved to lower its borrowing costs. It was a move that Buffett lamented in his annual letter to shareholders “…will be good news for Kraft Heinz and bad news for Berkshire.”

In addition, Berkshire’s $3 billion in preferred stock in Dow Chemical, which currently pays Berkshire $255 million a year, looks likely to end this year unless the market slumps, keeping the price of Dow Chemical shares below $53.72. .

Now that those deals have been coming to an end, a large chunk of preferred stock from a combined Kraft Heinz and Mondelez merger would be a fitting substitute.

Placing Their Bets

In August 2015, activist investor Bill Ackman took a $5.6 billion stake in Mondelez, a bet that clearly signaled he thought the snack maker would be acquired.

Among the other potential buyers could be Pepsi, which already owns Frito-Lay, and is facing declining sales in the traditional soda business, as consumers look for healthier options.

A Prize Worth Winning?

While a merger of Kraft Heinz and Mondelez has made sense to Wall Street, does it ultimately make sense in the world of consumer preferences in the 21st century?

When Mondelez was spun-off from Kraft, it was supposed to be the more exciting, high-flying of the two companies. However, its stock promptly slumped, and today it’s barely higher than it was five years ago. Many of Mondelez’s brands, which include Triscuit, Ritz, and Chips Ahoy!, reflect the consumer tastes from the 1930s-1960s, and its Oreo cookie goes back even further, first hitting store shelves in 1912. These brands are still popular, but will they be in another fifty years?

So, is Mondelez even a prize worth winning? That depends on whether there are similar savings that can be wrung out of Mondelez as there has been with Kraft and Heinz. If Berkshire and 3G think there are, there could be the next global food giant ready to take the stage.

One thing that is clear, in the 21st century world of food manufacturing and distribution companies, the assumption is that size matters in order to have global reach that can take advantage of growing markets in South America, India and China.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Supersonic Business Jets Will Boost Fractional Jet Ownership

(BRK.A), (BRK.B)

It’s no secret that the fractional jet ownership business has struggled in recent years, with several competitors leaving the market, and the merger of Flexjet and Flight Options. While Berkshire Hathaway’s NetJets is healthy, NetJets Executive Vice President, Sales & Marketing, Patrick Gallagher, noted on AINonline that “We’re growing our market share of a shrinking pie.”

All that may soon change with the coming of a new generation of supersonic business jets, produced by companies such as the Aerion Corporation. The planes will cruise at Mach 1.4, cutting three hours off New York City to Europe, and six hours or more off long Pacific routes.

The planes will give corporate leaders and other high-end travelers a compelling reason to consider fractional ownership.

Even cross-country travel, which draws additional concerns about sonic booms, will be faster. Aerion claims that its Boomless Cruise(sm) flight is feasible at speeds up to Mach 1.2, depending on atmospheric conditions, principally temperature and wind.

The company hopes that the U.S. will adopt International Civil Aviation Organization (ICAO) standards, permitting supersonic speeds over the U.S. Supersonic flights are currently prohibited.

Aerion claims that at speeds around Mach 1.2 a “sonic boom would, essentially, dissipate before reaching the ground.”

Another fledgling supersonic business jet manufacturer, Boston-based Spike Aerospace, calls no sonic booms the “holy grail of the next generation of aircraft.” It hopes to have its 18-passenger jets in the market by the early 2020s.

Even before these jets debut, NetJets is focusing on the growth potential of its long-haul business.

NetJets is looking to expand its long-haul business by offering new pricing incentive programs developed for Challenger 350 and Global shareowners.

NetJets hopes to capture a portion of the business that is currently going on commercial airlines or ad hoc charter by providing operational savings on 3.5-plus-hour flights for Challenger 350 shareholders who have purchased a minimum of 50-plus hours (1/16th of a share).

NetJets’ cross-country program is aimed at flyers travelling cross-country or to Europe on a super-midsize airplane like the Challenger 350. Currently, the average NetJets flight time is two hours, and the goal is to increase the number of hours of flight time.

NetJets and the Supersonic Market

The new supersonic business jets will fall into an interesting category of jets that will have a decided advantage over other private jets, but will be too expensive for most people to own outright.

While the supersonic business jet market offers opportunity, it also comes at a high cost, with the price of each jet at over $100 million.

That’s the perfect opening for fractional ownership companies to plot their growth.

Currently, Flexjet is the only company to place a firm order for the jets. In 2015, they ordered twenty of Aerion’s AS2 aircraft.

The Aerion AS2 is a three-engine jet and is larger than the originally conceived Aerion supersonic business jet. Fuselage length is 160 feet and maximum takeoff weight is 115,000 pounds. Minimum projected range is 4,750 nautical miles with the intention to achieve a range of more than 5,000 nautical miles.

The aircraft will have a 30-foot cabin in a two-lounge layout plus galley and both forward and aft lavatories, plus a baggage compartment that is accessible in-flight. Cabin dimensions widen from entryway to the aft seating area where height is six feet, two inches and cabin width is seven feet, three inches.

Carrying eight to 12 passengers, the AS2 has an intercontinental-capable range of 4,750 nautical miles at supersonic speed.

While, NetJets has yet to announce any orders, it’s clear that only the strongest of the fractional ownership companies will be able to compete in this market, giving them a clear advantage over smaller charter companies, and a major capability advantage over commercial airlines.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.