Category Archives: Commentary

Commentary: Death of Retail? Grandscape Says Not So Fast

(BRK.A), (BRK.B)

“Retail is dead,” proclaims just about every financial headline these days, but Berkshire Hathaway continues to prove that wrong as it builds out Grandscape, a 400+ acre development featuring over 3 million square feet of retail, entertainment, dining, residential, office and attractions.

Anchored by Berkshire’s Nebraska Furniture Mart, which alone takes up 100 acres and has a 560,000 square foot retail showroom, Grandscape continues to use the bigger is better philosophy.

It’s a philosophy that’s attractive to other retailers that don’t want to simply bemoan the death of the bricks-and-mortar retail experience as a casualty of the internet.

The latest retailer to break ground at the development is SCHEELS, which is constructing a two-level, 331,000 square foot building that will be the largest All Sports Store in the world.

“After more than 10 years studying the Texas market, we found a great location to build our largest store yet,” said Steve D. Scheel, SCHEELS Chairman of the Board. “This one-of-a-kind retail adventure will attract sports enthusiasts, outdoor explorers and shoppers seeking a wide variety of fashion, footwear and homegoods. We are excited to bring our expertise and enthusiasm to Texas for the first time.”

In keeping with the trend to make shopping more experiential, SCHEELS will have a 65-foot, 16-car operating Ferris Wheel, a 16,000-gallon saltwater aquarium with more than 600 fish, and a wildlife mountain. Shoppers will get the chance to try out interactive arcade games and sports simulators.

Berkshire continues to believe in the retail experience, even as it is forced to evolve from the days of strip malls and malls with department stores as anchor tenants, and its $1.5 billion investment in Grandscape shows its putting its money where its mouth is.

© 2018 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: Berkshire Gives Up on Enormous Australian Gas Field

(BRK.A), (BRK.B)

The defining characteristic of any mirage is that the closer you think you are to it, the further away it seems to get.

Sadly, in what is sure to be a major disappointment for Berkshire Hathaway, after years of work its CalEnergy subsidiary is planning to decommission two exploration wells which have been used to test the potential for natural gas production in the Whicher Range, south of Busselton.

The gas field had been estimated to contain four trillion cubic feet of gas-in-place.

The problem has always been how to get it.

CalEnergy is the sole titleholder and operator of the exploration permit EP 408 located approximately 280 kilometers south of Perth, and covers both the Whicher Range and Wonnerup gas fields.

The test wells, WR1 and WR4, will be sealed with concrete and the well heads removed.

The land immediately around the well locations will be rehabilitated in line with conditions to be set out by the Department of Mines, Industry Regulation and Safety.

In 2016, Peter Youngs, the Managing Director of CalEnergy Resources Group, discussed with MazorsEdge the progress on the development of the gas field, noting that “the field represents a large in place gas resource, its characteristics are challenging and there is much work still remaining to move this resource to a commercially developable status.”

Unfortunately, those obstacles proved to be too much to surmount.

© 2018 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: Energizer’s Purchase of Spectrum Brands Battery Division Increases Competition for Berkshire’s Duracell

(BRK.A), (BRK.B)

The announcement that Energizer Holdings, Inc. has entered into a definitive agreement to acquire Spectrum Brands’ Global Battery and Portable Lighting Business for $2.0 billion in cash means increased competition for Berkshire Hathaway’s Duracell Batteries.

The acquisition puts the Varta and Rayovac brands into Energizer’s product portfolio.

Spectrum Batteries generated 2017 revenue and EBITDA of $866 million and $169 million, respectively.

The acquisition price represents a transaction multiple of 7.5 times Fiscal 2017 EBITDA, net of tax benefits with a net present value of approximately $100 million and including estimated run-rate synergies of $80 to $100 million and the costs to achieve.

The transaction is expected to deliver modest accretion to Energizer’s adjusted earnings per share and free cash flow in the first year, excluding one-time transaction and integration costs, and will achieve additional favorable accretive impacts following our realization of targeted synergies.

“The acquisition of Spectrum Batteries represents a compelling strategic, operational, and financial fit for Energizer,” said Alan R. Hoskins, Chief Executive Officer of Energizer. “The combination will enable us to leverage Spectrum Brands’ manufacturing assets, significantly expand our international business and enhance our long-term brand building capabilities as we broaden our portfolio with the Varta and Rayovac brands and our geographies with Spectrum Batteries’ passionate global colleagues. We have great respect for Spectrum Batteries and the strong business its colleagues have built, and are excited to bring together the talented colleagues from around the globe from both organizations to drive our business to new heights. In addition, the top-line and free cash flow growth from this acquisition, combined with the opportunity to realize meaningful synergies, will further enhance our ability to drive long-term shareholder value.”

Energizer intends to fund the acquisition through a combination of existing cash and committed debt facilities, expected to consist of a new term loan and senior notes.

As for Berkshire’s Duracell, it will still be the biggest player in the alkaline battery market. Sales of Duracell batteries in the U.S. alone topped $1 billion in 2016, eclipsing Eveready’s and Rayovac’s combined sales.

© 2018 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: Strong 2017 Sales for Duracell Show the Continued Utility of the Alkaline Battery

(BRK.A), (BRK.B)

Berkshire Hathaway’s battery-maker Duracell, which it acquired from Procter & Gamble in 2016, is proving the continued value of tried and true alkaline batteries.

While much of the focus in the press these days is on lithium-ion and nickel-metal-hydride batteries, and the search for batteries with more exotic chemistries, the trusty alkaline battery, which was first patented by Union Carbide in 1960, has continued to be a big sales winner.

According to reports, Duracell’s third quarter sales rose 6 percent year-to-year from 2016, as the demand for alkaline batteries continues to grow.

Sales of Duracell batteries in the U.S. alone topped $1 billion in 2016, eclipsing its major competitor brands, Eveready and Rayovac, combined sales.

Alkaline Batteries Essential During Disasters

The 2017 hurricane season that devastated the Caribbean, Florida and Houston, Texas, showed that rechargeable batteries are of limited use when the power grid goes off-line for weeks or months. They also have the downside of energy loss when stored long term. Durable alkaline batteries, which have a storage life of over 10 years, have an important place in helping people prepare for and recover from disasters.

It was a point that Duracell was able to make through its own disaster relief teams.

In Puerto Rico, Duracell’s PowerForward teams have been on the ground across the island. Its emergency response teams have given out tens of thousands of batteries, and provide charging stations through their specially outfitted vehicles. The vehicles are delivering more than $1 million worth of batteries, making this the program’s largest deployment to date.

Duracell’s PowerForward fleet consists of five trucks, custom-designed to handle specific disasters, and strategically stationed to get to any U.S. location within 24 hours. Each one is equipped with mobile charging stations and stocked with thousands of Duracell batteries.

In Puerto Rico, Duracell deployed two of its highest capacity vehicles. The Heavy Haulers pull trailers that help them transport over 100,000 AA batteries – more than any other vehicle in the fleet. Normally, one is stationed in San Francisco, California while another is kept in Portsmouth, New Hampshire. These trucks specialize in handling earthquakes, floods, landslides, wildfires, hurricanes and winter storms.

The Battery for Everyday Use

While natural disasters draw attention to the continued usefulness of alkaline batteries, for most of us it is their continued utility for more mundane needs, such as toys, electronic devices, and smoke detectors where their low cost, long storage life, and durability win out.

And Berkshire’s got the sales revenue to prove it.

© 2018 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: What Does Sale of DaVita Medical Group Mean for Berkshire Hathaway?

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The news that health services company Optum is purchasing DaVita Medical Group, a subsidiary of DaVita Inc., for $4.9 billion may bring a windfall for Berkshire Hathaway.

Berkshire has a $2.27 billion stake in DaVita Inc., which works out to roughly 22.03% of the company’s market cap and approximately 23.57% of the institutional ownership, and news of the sale gave Berkshire an immediate paper profit boost of $230 million.

The longer term prospect is good for Berkshire, as well.

According to DaVita, the company plans to use the proceeds from the transaction for significant stock repurchases over the one to two years following the closing of the transaction, as well as to repay debt and for general corporate purposes.

“Following this transaction, DaVita will continue to be a leader in population health management, with a focus on our U.S. and international kidney care businesses,” DaVita CEO Kent Thiry said. “We also expect to pursue other investments in health care services outside of kidney care.

Berkshire has long been rumored to be interested in acquiring DaVita, and entered into a standstill agreement with Davita in May 2014, pledging not purchase more than 25% of the company.

And while Berkshire doesn’t reveal whether Warren Buffett, or his portfolio managers Ted Weschler and Todd Combs, purchased or sold a particular security, the push to acquire shares in DaVita is generally credited to Ted Weschler.

It looks like he was right on 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: Akzo Nobel and Axalta Coatings Merger Would Benefit Berkshire Hathaway

(BRK.A), (BRK.B)

A possible merger between Akzo Nobel NV and Axalta Coating Systems would give Berkshire Hathaway a major stake in a world-leader in the coatings market.

The Dutch coatings company Akzo Nobel is reportedly in the discussion stage with Philadelphia-based Axalta on a deal that could create a $30 billion coatings behemoth. The discussions have been described as a “merger of equals’ even though Axalta is the smaller of the two companies.

One of the benefits for Akzo Nobel would be to make it too large for takeover by other coasting companies, including PPG Industries.

The potential merger has already benefited Berkshire, as shares in Axalta soared 17% to Friday’s closing price of $33.15 on news of the discussions.

Berkshire currently owns 23,324,000 shares of Axalta, which is approximately 9.59% of the company, and has a value of roughly $745,668,263. 20 million of its stake was purchased in April of 2015 from The Carlyle Group for an aggregate purchase price of $560 million, or $28.00 per share.

Axalta was founded in 1866 as Herberts, the original producer of Standox paint products. Spun off of DuPont Performance Coatings in 2013, it was sold to The Carlyle Group and renamed Axalta Coating Systems. Today the company is a leader in coatings for commercial vehicles.

When Berkshire took its stake in Axalta back in 2015, the company looked like a possible merger candidate with Berkshire’s Lubrizol. However, Berkshire’s never been shy about owning significant minority stakes in companies if they are purchased at favorable prices.

Such is the case with Axalta.

© 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 the Door Open Again for a Berkshire Acquisition of Oncor?

(BRK.A), (BRK.B)

Berkshire Hathaway’s ongoing interest in acquiring Oncor Electric Delivery might still have a chance, if only a faint one.

Sempra Energy, which this August outbid Berkshire for Oncor, is running into some of the same resistance that torpedoed the last two attempts to acquire what is the largest distribution and transmission system in Texas.

Sempra’s $9.45 billion bid won out after Berkshire refused to get into a bidding war and stood firm on its $9 billion all-cash consideration that implied an equity value of approximately $11.25 billion for 100% of Oncor.

Now, San Diego-based Sempra has to gain the approval of the Public Utility Commission of Texas, and Commissioner Ken Anderson is raising concerns on the amount of money Sempra will have to raise in order to finance the deal and the credit rating of the company.

The PUC has to rule on whether the Sepra deal is in the public’s interest, and on October 5, Moody’s Investors Service issued a comment titled “Sempra Energy: Revised structure for EFH/Oncor acquisition reduces complexity but transaction remains credit negative.”

Credit negative is not the case with Berkshire. Certainly, financing a deal is not a problem for Berkshire, as it is sitting on over $100 billion in cash that it has been hard-pressed to invest as of late.

Commissioner Anderson’s concern is a valid one, as Oncor has been mired in the decade long financial morass that found its parent company Energy Future Holdings Corp. in bankruptcy after being loaded with $40 billion in debt from a leveraged buy-out engineered by private equity firms KKR & Co. and TPG.

While it’s a longshot that Berkshire can get another shot at Oncor, perhaps a very long shot, the one thing Texas ratepayers need at this point is financial stability.

© 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: 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.