Categories
Commentary Special Report Warren Buffett

Berkshire Hathaway’s Biggest Question

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Who will succeed Warren Buffett, who turns 85 in August, as the head of Berkshire Hathaway? This would seem to be the biggest question hanging over the shareholders of the massive conglomerate. Will it be Greg Abel, the head of Berkshire Hathaway Energy, or Ajit Jain, who heads up Berkshire’s reinsurance business? Both are frontrunners, especially since Vice-chairman Charlie Munger, who is himself 91 this year, specifically dropped their names in his shareholder letter included in the 2014 Berkshire Hathaway annual report. Yet while people speculate on Buffett’s successor, I would suggest there’s a far more important question. After all, CEOs come and go, and whoever follows Buffett and Munger will eventually be succeeded by others.

So, the biggest question is not who will succeed Buffett; it’s how will they be compensated. In other words, how will they participate in the growth of the company as compared to how has Buffett participated?

Can a unique situation be replicated?

Berkshire Hathaway may be unique in the sheer number of companies that operate under its umbrella. It’s not only a conglomerate; it’s a conglomerate of conglomerates. For example, Berkshire’s Marmon Group has 160 independent manufacturing and service businesses, and Berkshire’s Scott Fetzer Group oversees 21 diverse companies. But even this is not what is most unique about Berkshire. What’s most unique is that Warren Buffett is participating first and foremost just as you do, as a shareholder.

The most underpaid CEO in the Fortune 500

For a man overseeing a conglomerate with a market value of roughly $347 billion, you would think that Buffett receives sky high compensation, especially since that conglomerate’s share value has risen 1,826,163% (yes, that’s not a misprint) from 1966 to 2014. However, Buffett (and Charlie Munger) have annual salaries of only $100,000. What’s more, there are no stock options and no bonuses. Buffett and Munger’s rock bottom salaries mean that they are participating in Berkshire just like you are, as long-term shareholders that care more about increasing the underlying intrinsic value of the company than any short-term trick to boost the stock price.

Think that doesn’t matter?

“The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance,” notes Michael Cooper of the University of Utah’s David Eccles School of Business. Prof. Cooper co-authored a paper that proved just that.

Just look at David Zaslav, CEO of pay-TV channel Discovery Communications. Zaslav had a total compensation package of $156.1 million in 2014, yet the same year the stock lost a quarter of its value, even as the broader market boomed. The shareholders felt the pain, while Zaslav got the gain. That’s not exactly participating on the same basis.

At the 2015 Berkshire annual meeting, Buffett acknowledged that when CEO incentives get out of line with a company’s goals bad things can happen.

“Charlie and I believe in incentives, Buffett said. “But we have seen decent people get into trouble with incentives. The CEO promises a certain number, and his executives don’t want to make the CEO look bad. Egos get involved. You have to be careful in the messages you send as CEO. If you don’t want to disappoint Wall Street, your managers will react.”

A Hedge without the 2 and 20

Hedge fund managers built their fortunes on the 2% annual management fee and a 20% of the profits, but that’s not necessarily the same for the hedge fund’s investors, who don’t get that management fee to cushion any tumble in profits. Remember in 2008 when Buffett bet hedge fund manager Ted Seides that a low-priced index fund tracking the S&P 500 would beat the average of any 5 hedge funds over a 10-year period that Seides picked? Well, the “Million-Dollar Bet” is looking more and more like a sure bet for Buffett, because he knew the high friction costs would hurt the hedge funds’ returns.

In fact, Berkshire’s a conglomerate that operates as hedge fund without the management fee structure. Like a hedge fund, it can buy 100% of a company (unlike a mutual fund), it uses derivatives to increase its leverage and hedge its risk, and because its leadership is in lock step with its investors, all that benefit goes right to each shareholder.

Whose side will they be on?

In 2011, David Sokol, who once looked like the heir apparent to Buffett, abruptly resigned after it turned out that he had accumulated over 96,000 shares of Lubrizol before bringing the company to Buffett’s attention as a potential acquisition. Buffett later called Sokol’s actions “inexplicable” and “inexcusable,” and while the SEC dropped its probe, the Sokol fiasco showed that’s it’s not automatic that Berkshire’s leadership will align with its shareholders interests.

Or, as Charlie Munger has said, “Trustworthiness is more important than brains.”

Berkshire’s Future Leadership

Berkshire’s future generations of leadership may be great stock pickers, able to build portfolios that equal the $100 billion portfolio that Buffett built. They may be great capital allocators like Buffett, able to use the profits from one company to by other companies with even greater growth potential. They might even be as savvy opportunists, unleashing Berkshire’s mountains of cash just when others credit has dried up. However, the big question is whether they do it on the same basis as Buffett and Munger, on behalf of all the shareholders.

© 2015 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 Kraft Heinz

Berkshire Hathaway Becomes Majority Shareholder in Heinz

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On Wednesday, June 17, Berkshire Hathaway exercised warrants it owned to purchase about 46.2 million Heinz shares. The purchase, which cost Berkshire only $462,000, makes Berkshire the majority shareholder with ownership of 52.5 percent of H.J. Heinz.

Berkshire’s ownership stake will be diluted once the merger of Kraft and Heinz goes through, however, Berkshire will still be the largest shareholder in the combined company.

The other major shareholder will be Brazilian private equity firm 3G Capital.

Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. On June 9, a waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), as amended, expired with regard to the proposed merger.

The expiration of the HSR Act waiting period satisfies one of the conditions to the closing of the proposed transaction, which remains subject to approval by Kraft shareholders, antitrust clearance in Canada and other customary closing conditions.

Heinz also received notice that the Canadian Competition Bureau has issued a “no action” letter indicating that the Bureau does not intend to challenge the companies’ proposed merger.

The deal is expected to close in the second half of 2015.

Powerful Brands

The combined company will have a portfolio of packaged food brands that includes Heinz ketchup, Philadelphia cream cheese, and Oscar Mayer meats.

Kraft has $18 billion in annual sales, employs 22,500 workers, and boasts that 98 percent of U.S. and Canadian households have Kraft products in their kitchens. Nine of Kraft’s brands have more than $500 million in annual sales, and 80 percent of sales are in categories where they hold the #1 or #2 market position.

Kraft Heinz will have $28 billion in sales with eight $1+ billion brands and five brands between $500 million-$1 billion.

© 2015 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

Berkadia Arranges for $648.2 Million in Financing for Senior Housing Portfolio

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Berkadia has provided loan financing through its Fannie Mae Program for $648.2 million in financing for the acquisition of 32 senior housing properties spanning 12 states, including California, Missouri, Texas and Washington.

The borrower will use the financing for the acquisition of the portfolio, which sold for $875 million. The 10-year, fixed-rate loan features a 4.17 percent interest rate, 73.5 percent loan-to-value ratio and a 30-year amortization schedule. The individual loans were crossed collateralized and crossed defaulted.

The financing came through Berkadia’s Seniors Housing and Healthcare group, and Managing Director Christopher Fenton and Senior Director Jay Healy of Berkadia’s Seniors Housing and Healthcare group worked with NorthStar Realty Finance Corp. to secure the financing.

“Our team’s extensive underwriting experience in the seniors housing sector enabled us to secure attractive loan terms for this sizable portfolio in only 45 days from when the application was signed,” said Fenton. “This experience, coupled with our deep market insight and excellent client service, allowed us to effectively and efficiently manage this portfolio’s impressive scale and geographic scope.”

About Berkadia

Founded in 2009 as a 50/50 joint venture between Berkshire Hathaway and 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 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.

© 2015 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
Berkshire Hathaway Specialty Insurance Insurance

Berkshire Hathaway Increases Asia Presence with Minority Stake in IAG

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On the heels of Berkshire Hathaway’s recent move into the Australian insurance market, the company has announced that it has purchased a minority stake Australian insurer Insurance Australia Group Limited (IAG).

Berkshire has agreed to pay A$500 million (US$387.8 million) for 3.7% of IAG.

In addition to the ownership stake, Berkshire will receive 20% of IAG’s premiums and in exchange will pay 20% of its claims over the next 10 years, a move that right off the bat will bring Berkshire $1.78 billion of premium annually.

“Our strategic partnership with IAG will help fast-track our entry into this region,” Warren Buffett said. “We have worked with IAG for more than 15 years and over that time we’ve developed a good understanding and respect for their people.”

IAG is the parent company of a general insurance group with operations in Australia, New Zealand, Thailand and Vietnam. The company employs more than 15,000 people.

IAG’s brands include NRMA Insurance, CGU, SGIO, SGIC, Swann, WFI and Lumley Insurance (Australia); NZI, State, AMI and Lumley Insurance (New Zealand); Safety and NZI (Thailand); and AAA Assurance (Vietnam). IAG also has interests in general insurance joint ventures in Malaysia, India and China.

Standard & Poor’s has assigned a ‘Very Strong’ Insurer Financial Strength Rating of ‘AA-’ to IAG’s core operating subsidiaries.

Berkshire Hathaway Specialty Insurance Company (BHSI) recently received its insurance license to provide all lines of General Business in Australia, and established operations in Sydney. Chris Colahan was named President of BHSI’s Australasia Region, and four executives from American International Group are also on board.

Non-Dilution Rights

Under a waiver granted by the Australian Securities Exchange, IAG has agreed to give non-dilution rights to Berkshire, granting the company the right to buy shares at the same price as other investors if there is an issuance of securities.

(This article has been updated with new information since it was published.)

© 2015 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
Fruit of the Loom

Fruit of the Loom Negotiating to Sell European Luxury brands to Private Equity Firm

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Berkshire Hathaway’s Fruit of Loom is in negotiations to sell its European lingerie brands to a private equity firm.

In 2014, Fruit of the Loom began looking for a buyer for its European luxury lingerie brands.

According to the Financial Times, private equity group Perceva is in exclusive talks with Fruit of the Loom to purchase Variance, Lou Paris, Vanity Fair, BestForm, and Cherry Beach swimwear.

The lingerie brands were acquired by Fruit of the Loom in 2007 for $350 million from branded lifestyle apparel company VF Corporation . Fruit of the Loom has run them under the umbrella Vanity Fair Brands.

Perceva is interested in the brands because sales of luxury lingerie are strong in France, which leads the Euro-zone in per capita spending on women’s undergarments.

© 2015 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 performance.

Categories
Dairy Queen

Dairy Queen Wins Big With Jurassic World Tie-In

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With Universal’s Jurassic World racking up the highest grossing global opening weekend ever, and coming in a close second to Marvel’s The Avengers for the biggest U.S. opening weekend, Berkshire Hathaway’s Dairy Queen found its movie tie-in has become a monster hit as well.

Jurassic World posted a $204.6 million opening weekend, making it the biggest opening weekend for any film ever to debut in the month of June.

The Jurassic World tie-in is a coup for a midsized quick-service restaurant chain such as Dairy Queen, which has 6,400 U.S. locations, as compared to McDonald’s 14,350 restaurants, McDonald’s movie tie-in is with the animated film, Minions, which opens the U.S, market on July 10.

The ad campaign is Dairy Queen’s first movie tie-in in 20 years, and was created by Minneapolis-based Clarity Coverdale Fury Advertising.

Dairy Queen is promoting its Jurassic Smash Blizzard Treat and Jurassic Snack Wrap Duo through a mix of television, digital advertising, and social media. The national and spot advertising already had 4,803 airings as of June 15, according i.spot.tv.

The campaign’s tagline is “An adventure in every bite.”​

The ads feature a customer purchasing a Jurassic Smash Blizzard Treat while the Dairy Queen is under attack by raptors.

“We are absolutely thrilled to be partnering with Universal Pictures for the new Jurassic World promotion,” said Tim Hawley, Vice President of Marketing Communications for American Dairy Queen Corporation. “Like the Dairy Queen system, the Jurassic Park franchise has a tremendous fan base and incredible staying power. This is a spectacular cross-promotional, retail marketing program for us to kick off the summer season and it is certainly one of the highlights of our 75th Fanniversary year.”

Movie tie-ins can be high risk if the movie fails to catch fire. While Dairy Queen is rejoicing with its connection to a box office smash, GM may be less than sanguine with its Chevy Volt tie-in to the Disney flop, Tomorrowland.

For more information, read a Mazor’sEdge special report on Dairy Queen.

© 2015 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
Berkshire Hathaway Energy

Public Utility Commission Rejects Switch’s Exit from NV Energy

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The state of Nevada’s Public Utility Commission (PUC) voted 2-1 to reject Switch Communication’s application to leave NV Energy, a subsidiary of Berkshire Hathaway Energy (BHE). Switch is a developer and operator of data center facilities.

Despite the rejection, it looks inevitable that Switch will move to another energy supplier, and it is all just a matter determining the appropriate exit fee.

The PUC had proposed a $27 million exit fee, and Switch asked to only pay $18.5 million.

Casinos Want to Leave Too

Switch Communications is not the only one pushing to leave the utility. Caesars, Wynn Las Vegas, MGM Resorts International, and Las Vegas Sands Corp. are all now planning to purchase their power from another “qualified energy provider,” using the exit provision passed by the Nevada Legislature in 2001.

Heated Accusations from Wynn Las Vegas

In testimony before the PUC, Matt Maddox, president of Wynn Resorts, accused NV Energy of reaping huge profits from Nevada customers and taking the profits back to parent company Berkshire Hathaway. The accusation is inaccurate, at least as to the ultimate destination of any profits, as Berkshire Hathaway lets BHE retain all of its earnings.

A big part of the conflict is related to who will bear the cost of closing the Reid Gardner coal-fired units in Moapa, Nevada. NV Energy has announced it will end its use of coal for electricity generation by 2019. The move is in accordance with Nevada’s Senate Bill 123 of the 2013 session that required NV Energy to close its lower-cost coal-fired generation facility.

The estimated $100 million in plant closing costs will be borne by ratepayers, and the casinos and Switch are hoping to leave before those costs are passed on to consumers.

© 2015 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 performance.

Categories
Berkshire Hathaway Energy

Central United States in Berkshire’s Solar Plans

(BRK.A), (BRK.B)

Berkshire Hathaway Energy, which is already a leader in solar energy generation in California and Arizona, is looking to the central U.S. to locate a new solar farm development. The company filed its land acquisition plans with the Midcontinent Independent System Operator (MISO), a Regional Transmission Organization that covers the transfer of energy along the interconnected transmission system in 15 states and the Canadian province of Manitoba.

According to the filing, BHE has acquired a site for solar generation development in MISO’s central region, consisting of 74 individual locations not to exceed 1 megwatt each.

The precise location of the land has not been released.

Currently Berkshire Hathaway Energy, through its subsidiary BHE Renewables, has 1,271 megawatts of owned solar generation.

© 2015 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
Dairy Queen

Dairy Queen Goes for First Movie Tie-In in 20 years with Jurassic World

(BRK.A), (BRK.B)

Dairy Queen continues to boost its national advertising profile with its new cross-promotion campaign tied to Universal Picture’s film Jurassic World, which hits theaters June 12.

The film is the next installment of Steven Spielberg’s Jurassic Park series.

Dairy Queen is promoting its Jurassic Smash Blizzard Treat and Jurassic Snack Wrap Duo through a mix of television, digital advertising, and social media. The national and spot advertising already had 3,765 airings as of June 9.

The campaign was created by Clarity Coverdale Fury Advertising, Inc., and is the first movie tie-in for Dairy Queen in 20 years.

The campaign features a customer purchasing Jurassic Smash Blizzard Treat while the Dairy Queen is under attack by raptors.

“We are absolutely thrilled to be partnering with Universal Pictures for the new Jurassic World promotion,” said Tim Hawley, Vice President of Marketing Communications for American Dairy Queen Corporation. “Like the Dairy Queen system, the Jurassic Park franchise has a tremendous fan base and incredible staying power. This is a spectacular cross-promotional, retail marketing program for us to kick off the summer season and it is certainly one of the highlights of our 75th Fanniversary year.”

The campaign’s tagline is “An adventure in every bite.”

For more information, read a Mazor’sEdge special report on Dairy Queen.

© 2015 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
CORT Special Report

Special Report: CORT Furniture Courts Academic Institutions

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With formerly generous relocation dollars in short supply in the aftermath of the 2009 recession, CORT Furniture has been aggressively seeking new markets. While relocation dollars still exist, “companies are no longer giving them out like candy,” says George Bertrand, CORT’s Regional Vice President for Operations and Sales.

Founded in 1972, and acquired by Berkshire Hathaway in January 2000, CORT’s primary business is providing rental furniture for homes, businesses and events (including trade shows), and providing relocation services. The company’s service area is the U.S. and the U.K., and annual revenues for all CORT operations exceeds $420 million.

Earnings in 2014 were roughly $36 million.

Seeking New Markets

With its core business hit hard by the 2009 recession, CORT expanded into the party rental business with the 2011 acquisition of the Seattle-based ABC Special Event Rentals, and the 2014 acquisition of another Seattle-area party rental business, AA Party Rentals. Party rentals now make up roughly $12 million in CORT’s annual revenues.

Academic Institutions Offer Opportunities for Growth

Another market CORT sees great potential in is providing furniture leasing to academic institutions.

Traditionally, academic institutions maintain huge inventories of furniture for dorm rooms that requires a high degree of maintenance and upkeep. These days, colleges and universities are increasingly aware that the on-campus quality of life is a major selling point to prospective students. They have upgraded athletic facilities with rock-climbing walls and rows of treadmills, and they have upgraded food services with gourmet entrees that are a far cry from the bland foods of yesteryear. They have also upgraded the dormitory experience, and in this area CORT is providing solutions that include furniture delivery service and ongoing maintenance.

Currently, only 14.3 percent of academic institutions are outsourcing their furnishing services, offering CORT a huge potential market for expansion.

According to CORT’s own survey, which they conducted with University Business Magazine, “budget restrictions” were the biggest impediments respondents cited in providing up-to-date and top condition furniture for students’ dorm rooms.

According to the survey results:

87 percent of respondents stated that budget and personnel restrictions are the biggest challenges facing their institution.

95 percent said the appearance and condition of their furnishings is important or very important to the maintaining the college’s image and integrity.

However, 37 percent described their furnishings as “outdated” and almost 20 percent said it’s “showing its age.

Out-sourcing their furniture needs to CORT is one way for institutions to keep their focus on academics, rather than on running a used furniture empire. CORT puts it simply. “Furniture leasing is a simple and affordable solution, especially as many colleges and universities are trying to meet increasing expectations with less available resources.”

© 2015 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.