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Benjamin Moore Commentary

Commentary: What a Can of Paint Says About Warren Buffett

(BRK.A), (BRK.B)

Founded by the Moore brothers in 1883, Benjamin Moore Company has been a leader in indoor and outdoor paint for over a century. The company introduced the popular Regal® Wall Satin interior latex paint in 1957, and in 1982 became the first company to do computerized color matching. The company positions itself as a premium paint manufacturer, and its products consistently rate well. In 2014, it was ranked highest in interior paint customer satisfaction by J.D. Power for the fourth year in a row.

In 2000, Berkshire Hathaway acquired the company for roughly $1 billion in an all cash deal. It’s a deal that has worked out well for Berkshire, and Warren Buffett told CNBC’s “Squawk Box” in October 2013 that Benjamin Moore had generated $1.5 billion in profit over the previous decade.

Independent Dealer Strategy

Since its founding, Benjamin Moore has sold its paint through a network of independent dealers. The dealer network encompasses 6,500 stores coast to coast, and the company sells its paint internationally as well, with a growing presence in China and Russia as the stand outs.

However, the place you won’t find Benjamin Moore paint is in big box stores, such as Lowe’s and Home Depot.

The Growth of the Big Box Store

The big box stores that are leaders in the do-it-yourselfer retail category have undergone explosive growth, with Home Depot claiming the record for fastest growth of a retail outlet. Founded in 1978, Home Depot reached its 100th store in 1998, and by 2011, it had 2,248 locations in the United States, Puerto Rico, Canada, and Mexico. Similarly, Lowe’s operates more than 1,830 stores within the same geographic area. Combined, they represent over 4,000 locations, with each one doing many times the business of a mom-and-pop store.

Where is Benjamin Moore?

The rise of the big box stores would seem to leave Benjamin Moore on the outside looking in, so why isn’t Benjamin Moore on the inside?

The answer is simple.

If Benjamin Moore made its paint available to Lowe’s and Home Depot, it would devastate the independent dealer network. The independent dealers count on their product exclusivity to protect their pricing and sales model. And, Buffett’s promise to protect that dealer network was such that when he got wind of Benjamin Moore’s CEO Denis Abrams plan to start selling to a major retailer, Abrams was fired on the spot.

Keeping a Promise

The move protected the independent dealers, but the deal also did something else. It protected Berkshire Hathaway’s reputation for living up to its word, especially when it comes to acquisitions.

Berkshire Hathaway’s sterling reputation for honoring its word has become another bullet in Warren Buffett’s famed “Elephant Gun.” It helped him land Iscar Metalworking Companies in 2006, when he received an unsolicited letter from Iscar’s Chairman Eitan Wertheimer offering to sell Iscar to Berkshire. Seven years later, Wertheimer cited his great relationship with Buffett and Berkshire as one of the reasons he felt comfortable selling his remaining 20% interest to Berkshire in 2013.

A Priceless Weapon

As Buffett goes on the hunt for the next elephant, he’s got $30 billion in cash in his arsenal. He’s also got the priceless value of keeping his word.

Hopefully, his successors will recognize the power of that weapon too.

© 2014 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.

Categories
Acquisitions Berkadia

Berkadia Adds $2 billion to its Loan-Servicing Portfolio with Acquisition of Keystone Commercial Capital

(BRK.A), (BRK.B)

Berkshire Hathway’s joint venture Berkadia Commercial Mortgage has purchased Keystone Commercial Capital.

The acquisition of the Phoenix, Arizona company will add $2 billion to Berkadia’s loan-servicing portfolio, which currently stands at $229 billion.

Berkadia is a third-party commercial mortgage servicer, as well as an approved lender for Fannie Mae, Freddie Mac, and HUD/FHA. The company was among the top Freddie Mac and Fannie Mae multifamily lenders for 2013.

Berkadia was founded in 2009 as a 50/50 joint venture between Berkshire Hathaway and Leucadia National Corporation.

© 2014 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.

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BH Media Special Report

Special Report: Berkshire Hathaway’s BH Media Finds Multiples Success

(BRK.A), (BRK.B)

Before the dawn of the Internet, newspapers were media cash-cows that produced strong, reliable revenue streams from display advertising and classified advertising. They became hot items, and throughout the 1990s they sold at high multiples. For example, the 1993 sale of the Boston Globe to the New York Times Company went for $1.1 billion.

In more recent years, newspapers have been known for declining readerships, and being burdened with high levels of debt.

When the cash-strapped New York Times decided to unload the Boston Globe, it sold for only $70 million–a 93% loss.

Going in the Exit

While everyone has been declaring the death of the American newspaper and running for the exits, one company, Berkshire Hathaway, has been running in the door.

Berkshire’s BH Media Group has assembled a growing empire of 69 newspapers and other publications located in the states of Virginia, North Carolina, South Carolina, Alabama, Florida, Texas, Iowa, Nebraska, Oklahoma and New Jersey.

Warren Buffett has long been a fan of newspapers, all the way back to his 1977 purchase of the Evening News, which serves Buffalo, New York. And, Berkshire had long owned a major share of the Washington Post.

But that was then. Are they still good business today?

EBITDA Comes Down to Earth

The magic word in the newspaper acquisition business is “multiple.” The multiple under consideration is the multiple of annual earnings before interest, taxes, depreciation, and amortization (EBITDA).

In BH Media Group’s case, the great news is that it’s paying reasonable multiples that are within the 4-5 EBITDA range.

Just under a decade ago in 2005, Lee Enterprises bought Pulitzer Inc. for 13 times EBITDA in a deal worth $1.46 billion. In contrast, Berkshire Hathaway spent a mere $143 million in acquiring 60 newspapers from Media General. And, unlike the newspaper empires of the 1990s, BH Media Group’s papers have no debt.

BH Media Group’s Evolving Strategy

BH Media Group originally set its sights on small markets, believing they presented the opportunity for a still healthy business model presenting local interest news that is hard to get from other sources. However, it has seen that larger markets have held up well in both circulation and advertising revenue.

For example, The Richmond Times-Dispatch in Richmond, Virginia, has a daily circulation of 102,258 and serves a population in the Metropolitan Statistical Area (MSA) of 1,231,980. Similarly, the Tulsa World in Tulsa, Oklahoma, has a daily circulation of 88,601 and serves an MSA population of 951,880. Papers in even smaller markets like Winston-Salem, North Carolina, and Roanoke, Virginia still reach sizable populations. The Roanoke Times, for example, has a daily circulation of 64,631, and serves an MSA population of over 312,000.

While print circulation may be fading, digital platforms are playing an ever larger role. For example, the Winston-Salem Journal, which has a daily circulation of 50,090 and serves an MSA population of 647,697, has 3 million page views per month.

Capturing Digital Revenues

Digital revenues come from a combination of online subscribers and online advertising. All the BH Media Group publications use a limited free access paywall system. Readers have proven willing to pay to get unlimited access to in-depth information about their local market. Some articles are available for free, but the number of free articles available per month varies by market depending on competition. BH Media Group is able to reduce the number of free articles in markets where the publications have no competitors.

Sharing Reporting Resources

BH Media Group doesn’t have a national news gathering operation, preferring to use the Associated Press. It knows that today’s reader is gathering national and international news from myriad outlets. Instead, it focuses on in its strength–local and regional reporting–where its reporters can gather far more stories than the local TV or radio stations.

In a market such as Winston-Salem, the Winston-Salem Journal has a newsgathering staff of 50, as compared to the 9 reporters at a local TV station. It’s in regional reporting that BH Media Group finds additional synergies. For example, its 30 print media properties in Virginia all have access to articles created by the collective BH Media Group publications, and can share reportage on state government and other state-wide issues.

Eliminating Crushing Debt Pressure

Over the past decade, newspapers have spent much of their time on debt relief, much of it through cost cutting through staffing cuts that have diminished their newsgathering ability. With Berkshire Hathaway’s deep pockets, BH Media Group’s papers all operate debt free, freeing them up to concentrate on being the most effective media outlets in their markets.

Growth Strategies

As for the future, BH Media Group continues to look aggressively for additional print media properties. It shuns the major markets, with Buffett having shown no interest in bidding for the Washington Post, which went to Amazon’s Jeff Bezos for $250 million in the fall of 2013. Instead, BH Media Group prefers to pick off the smaller markets that collectively having millions of readers and millions in revenues.

Warren Buffett is known for his patience. He is also known for growing his positions over time, and it wouldn’t be surprising if in another decade BH Media Group is the king of regional print media all over the U.S.

All purchased at reasonable multiples.

© 2014 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.

Categories
Berkadia

Berkshire Hathaway Becomes a Leader in Loan Servicing

(BRK.A), (BRK.B)

Founded in 2009 as a 50/50 joint venture with Leucadia National Corporation, Berkadia is a third-party commercial mortgage servicer, as well as an approved lender for Fannie Mae, Freddie Mac, and HUD/FHA. The company was among the top Freddie Mac and Fannie Mae multifamily lenders for 2013.

Berkadia’s Origin

Berkadia owes its origins to GMAC Commercial Mortgage Corporation, which was acquired in 2009 by Kohlberg Kravis Roberts & Co., Five Mile Capital Partners LLC, and Goldman Sachs Capital Partners. Christened Capmark Financial, the company had $10 billion of originations in 2008 and a servicing portfolio of more than $360 billion before running into bankruptcy in October 2009.

In a deal approved by the bankruptcy court, Capmark sold its mortgage loan and servicing to the newly formed Berkadia in a deal worth $515 million.

The deal brought Berkshire into the heart of the commercial loan serving business, and the company has one of the largest commercial real estate servicing portfolios.

The Joys of Loan Servicing

So, what is commercial loan servicing and why is it so valuable?

Commercial loan servicers handle the administration of a loan from its origination until the time it is paid off. In this role the servicer collects and disperses mortgage payments, insurance premiums and property taxes. While the mortgage payments are disbursed to the mortgager, the insurance premiums and property taxes are held in escrow until payment is due.

In the case of loan servicing, the role is strictly fiduciary and does not place risk of loss on the servicer. Disbursement are governed by the calendar rather than by the vagaries of an insurance company’s rising and falling claims.

Huge Portfolios

According to Morningstar Credit Ratings, in the case of Berkadia, as of June 30, 2013, the total primary and master serviced portfolio stood at $253.4 billion. In short, the size of the market is enormous, and the fees, collected month by month on mortgages are regular as clockwork.

The Future

Future Berkshire growth in debt servicing can come not only from increases in portfolio size, but from possible acquisition of additional percentages of ownership in Berkadia. For example, Berkshire’s ownership in GEICO was incremental and the company did not achieve 100% ownership until 1996.

Berkadia offers Berkshire shareholders another opportunity for growth with Leucadia doing much of the heavy lifting.

© 2014 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.

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Todd Combs and Ted Weschler

AT&T Acquisition of DirecTV Means Windfall for Berkshire Hathaway

(BRK.A), (BRK.B)

Whether AT&T’s newly announced $48.5 billion acquisition of DirecTV is ultimately good for both parties is uncertain, but one thing that is certain, is that it means a huge windfall for Berkshire Hathaway.

Berkshire reported owning 34.5 million shares of DirecTV as of March 31, 2014, and those shares were purchased at roughly half the tender price of $95 per share being offered by AT&T.

A Windfall for Berkshire

At the $95 share price, Berkshire’s holdings will be worth at least $3.27 billion, provided that it did not accumulate any additional shares after March 31.

A Winner for Todd Combs and Ted Weschler

Berkshire’s DirecTV stake was purchased by Todd Combs and Ted Weschler, as a part of portfolios they manage on behalf of the company.

Combs and Weschler each manage $7 billion portfolios, and have seen the amount of money under their supervision increased significantly in the past two years as Warren Buffett has grown more confident in their approaches.

Both stock pickers beat the S&P 500 in 2013. 2014 looks to be a very good year as well.

© 2014 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.

Categories
Acquisitions Berkshire Hathaway Energy

Berkshire Hathaway Makes Aggressive Move into Canadian Energy Market

(BRK.A), (BRK.B)

With the recently announced acquisition of AltaLink, Berkshire Hathaway’s newly christened Berkshire Hathaway Energy has made an aggressive move into the Canadian energy market.

New Canadian Beachhead Strategy

Under the moniker MidAmerican Energy, the company’s previous Canadian energy plays consisted of joint ventures where the other partners took the lead. Now, as Berkshire Hathaway Energy, the company is going out on its own to become a leader in the growing markets of Calgary and Edmonton, Alberta. It’s a move that will have BHE serving 85% of the population.

In acquiring AltaLink from SNC-Lavalin Group Inc. (TSX:SNC), BHE will take possession of 12,000 kilometers of transmission lines and 280 substations that bring electricity to 3 million Albertans. The total cost of the acquisition is C$3.2 billion, approximately US$2.9 billion.

Warren Buffett has long been known for a buy-and-hold acquisition strategy that places an emphasis on finding companies with top-flight management that is kept in place. Similarly, Berkshire Hathaway Energy, under the direction of chairman, president, and CEO Greg Abel, has the same philosophy. AltaLink’s management will remain headquartered in Calgary, and it will continue to operate as a local, independent company.

Employing the Berkshire Strategy

Also in keeping with another of Buffett’s strategies, Abel’s goal is to buy assets that will be owned forever.

It’s a sizeable acquisition as AltaLink had assets of C$5.9 billion as of December 31, 2013, and generated revenues of C$534.1 million in 2013.

Is this just another acquisition in BHE’s portfolio, or does it represent additional focus on the Canadian energy market?

Apparently, both.

On one hand, it’s a natural move for BHE’s combination of regulated utilities and infrastructure companies that span the U.S. and reach as far as the U.K. and the Philippines. But there’s reason to expect more. Greg Abel hails from Edmonton,  he knows Alberta’s power demands are only going to grow, and he sees AltaLink as a beachhead acquisition.

Alberta’s Growing Power Needs

Industry leaders are already calling for more than 9,400 MW of new thermal power and more than 3,000 MW of new renewable power to fuel future development in Alberta.

Under Abel’s direction, BHE has been growing dramatically, including last year’s purchase of NV Energy that brought 1.3 million customers in Nevada under its wing. In total, BHE has amassed a $70 billion portfolio of energy companies that produced $12.6 billion in revenues in 2013.

A Future Berkshire Leader?

At the youthful age of 51, Greg Abel is often mentioned on the short-list of Buffett successors. He also sits on the board of directors of H.J. Heinz Company board of directors–Berkshire Hathaway’s biggest acquisition since BNSF Railway was acquired in 2010. It’s no surprise his name is on people’s lips, considering BHE’s high-powered growth strategy that has no end in sight. And the Canadian energy market may just be where that strategy leads.

© 2014 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.