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Acquisitions Charlie Munger Warren Buffett

Buffett and Munger Defend 3G Capital’s Aggressive Lay-Offs

(BRK.A), (BRK.B)

Questions about Brazil-based 3G Capital were much on the minds of Berkshire Hathaway shareholders at Berkshire’s annual meeting on May 2. Warren Buffett defended 3G’s cost-cutting methods as necessary to bring complacent century-old companies into the modern age.

“3G has been buying businesses that have too many people,” Buffett explained.

Over the past year, Berkshire and 3G went in together on two major deals.

On December 14, 2014, Berkshire provided key financing for the combining of Burger King International with the Tim Horton’s chain. The move was a merger that created a new company, Restaurant Brands International (QSR), one of the world’s largest quick service restaurant companies with more than $23 billion in system sales and over 19,000 restaurants in nearly 100 countries and U.S. territories.

3G Capital ended up owning 51% of the combined company and quickly installed 3G’s partner Daniel Schwartz as the Chief Executive Officer and a Director of the company.

Berkshire came out of the deal owning 68,530,939 Class A 9.00% Cumulative Compounding Perpetual Preferred Shares, and warrants to purchase 8,438,225 shares of Common Stock for a penny a piece. Berkshire later exercised those warrants for a modest 354,000% paper profit on its money.

On March 25, 2015, 3G and Berkshire announced the merger of their jointly-owned H.J. Heinz Company with Kraft Foods Group. The combined Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. 3G partner Alex Behring will become the Chairman of Kraft Heinz. Berkshire will be the largest shareholder in Kraft Heinz.

In its growing partnership with 3G Capital, Berkshire Hathaway has found an aggressive partner that is looking to own major brands, and most importantly, to “right-size” them in the words of Charlie Munger.

Right-sizing refers to ruthless cost-cutting that cuts expenses in all areas, including laying off employees.

It’s the laying off of employees that drew questions at this year’s Berkshire annual meeting.

Counter to the Berkshire Ethos?

While some may mistakenly think Warren Buffett’s folksy persona might make him a softie when it comes to the management of companies, cost-cutting clearly is not just on the minds of 3G’s partners.

“You will have never found a statement from Charlie or me saying that a business should have more people than needed,” Buffett said at the meeting.

Charlie Munger compared the employment of excess personnel to the full employment guarantees in the former Soviet Union, where, as he quoted the old Russian saying, “We pretended to work, they pretended to pay us.”

Buffett went on to point out that Berkshire’s own strategy is to make sure its companies do not have excess employees, and as he joked about companies in general, “Any company that employs an economist has one employee too many!”

© 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 Berkshire Hathaway Reinsurance Group Berkshire Hathaway Specialty Insurance

Buffett Quells Talk of Big Insurance Takeovers

(BRK.A), (BRK.B)

As Berkshire continues to expand its insurance empire, including just last week adding a new Australasia Region to Berkshire Hathaway Specialty Insurance, rumors have swelled that the company might be ready to put some of its $30 billion in cash to work through a major insurance company acquisition.

At the Berkshire Hathaway annual meeting on May 2, Buffett dismissed such speculation. He noted that it is “almost certain that we will not take over a large commercial insurance company.”

A SIFI?

Berkshire’s continued growth in the insurance industry, which in addition to Berkshire Hathaway Specialty Insurance includes GEICO, National Indemnity, and Berkshire Hathaway Reinsurance Group, has brought questions as to whether Berkshire is now a Systematically Important Financial Institution (SIFI).

“There is no reason, in logic or in terms of what we’ve heard, to think that Berkshire would be designated as a SIFI,” Buffett noted. “I do not think Berkshire comes within miles of qualifying as a SIFI.”

While Berkshire Hathaway continues to build its own insurance companies, including bringing on board four former AIG executives for its new Australia-based unit, Buffett notes that insurance is only about 30-percent of Berkshire’s total business, with business units, such as BNSF Railway, being much larger.

The insurance and transportation units helped propel Berkshire’s 2015 first quarter earnings up almost 10% over first quarter 2014, with lower fuel costs for BNSF a particular factor.

© 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.

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BNSF Charlie Munger Dairy Queen Marmon Group Nebraska Furniture Mart

5 Things You Probably Didn’t Hear at the Berkshire Hathaway Annual Meeting, Even if You Were There

(BRK.A), (BRK.B)

Here are five things gleaned from the Berkshire Hathaway Annual meeting in Omaha, Nebraska, that you might not have learned, even if you were there.

1. That new DOT tank car standards will lower tank car capacity from 31,800 gallons to 30,300 gallons, but BNSF can maintain capacity by adding three extra cars per train.

2. That Berkshire’s HomeServices Lending is now originating $250 million in mortgages a month.

3. That Nebraska Furniture Mart currently has no plans to follow-up its new mega-store in The Colony, Texas; with new stores in other markets.

4. That Dairy Queen’s overseas growth is bypassing Western Europe to focus on Eastern Europe and other emerging markets.

5. That even with new federal tank car standards coming, Union Tank Car is not making the manufacture of new oil tank cars its biggest priority, because they recognize that new pipelines will get built.

And One Thing You Probably Did Hear

“If other people weren’t so often wrong, we wouldn’t be so rich!”—Charlie Munger.

© 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.

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Berkshire Hathaway Energy

BHE Renewables to Build 440-Megawatt Wind Farm

(BRK.A), (BRK.B)

BHE Renewables, a subsidiary of Berkshire Hathaway Energy, will add to its wind generating capacity with the acquisition of the Grande Prairie project from Geronimo Energy.

The 400-megawatt wind farm will be located about 12 miles northeast of O’Neill, Nebraska, and will begin construction this summer. The completion date will be in 2016. The new wind farm will be the largest in the state and will increase Nebraska’s wind energy capacity by nearly 50 percent.

BHE Renewables currently owns and operates a number of wind farm projects, including the 300-megawatt Jumbo Road project near Hereford, Texas; 168-megawatt Pinyon Pines I and 132-megawatt Pinyon Pines II projects, located near Tehachapi, California; and the 81-megawatt Bishop Hill II project in Henry County, Illinois.

“We are excited to be constructing this wind farm in Holt County, our first project in the state,” said Bill Fehrman, president and CEO of BHE Renewables. “The Grande Prairie project will have a major impact on Nebraska’s economy and energy future while helping our customer, Omaha Public Power District, meet its long-term renewable goals.”

BHE Renewables also acquired the 225-megawatt Walnut Ridge Project in Illinois, and plans to begin construction in 2016.

Founded in 2011, BHE Renewables owns and operates more than 3,400 megawatts of wind, solar, geothermal and hydro resources that produce energy for customers under long-term power purchase agreements. The company has invested more than $10 billion in renewable energy resources and will have more than 1,300 megawatts of wind generation capacity in operation when recent acquisitions are complete.

In addition to its investments in wind generation, BHE Renewables owns 1,271 megawatts of solar-powered generation in Arizona and California, 10 geothermal facilities in California’s Imperial Valley, and two hydroelectric facilities, one in Hawaii and one in the Philippines.

© 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

Berkshire Hathaway Specialty Insurance Adds Australia to Growing List of Countries

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Australia is the latest country for Berkshire Hathaway’s Boston-based Berkshire Hathaway Specialty Insurance Company (BHSI). The company received its insurance license to provide all lines of General Business in Australia, and established operations in Sydney.

Wasting no time, BHSI has already started providing property, casualty, financial lines and marine cargo insurance in Australia.

Chris Colahan was named President of BHSI’s Australasia Region, and four executives from American International Group are also on board.

“BHSI is committed to expanding into geographic markets and lines of business where we can provide financially strong, highly responsive underwriting solutions and market leading service. Our move into Australia reflects this strategy. Under Chris’s leadership, we’ve already built a stellar underwriting, claims, and functional team to serve the needs of the Australian market,” said Peter Eastwood, President of BHSI.

Chris Colahan joins BHSI from RSA Insurance Group, where he was most recently Chief Executive Officer, Asia, and before that, Chief Executive Officer, Hong Kong. He was also previously Country Manager, Singapore Retail, and Regional Manager, Strategy and Change, Asia and the Middle East, at RSA. He began his career in Australia at Westpac Banking Corporation.

In addition to its Australian platform, BHSI has established operations in the United States, Canada, Singapore and Hong Kong. The company is pursuing its insurance license in New Zealand.

© 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
BNSF

BNSF Adds Ethanol Trains to Parade of Oil Trains

(BRK.A), (BRK.B)

BNSF Railway’s oil trains have been in the news almost every day these past few years, as they move oil from the Bakken formation to refineries both east and west. Now, BNSF is adding ethanol trains to the mix.

Aventine Renewable Energy Inc., a leading producer, marketer and supplier of ethanol, has started using BNSF’s100-car unit trains to ship ethanol to its facilities.

Dedicated unit trains move single-bulk commodities such as coal, grain, minerals, liquids, special project cargo and oversized commodities non-stop between a single origin and destination.

Aventine announced its first BNSF unit-train shipment of ethanol produced at its two ethanol facilities in Aurora, Nebraska, pulled out of Aurora on April 19, heading to Birmingham, Alabama. The ethanol will be blended in gasoline to enhance octane, and will also help reduce America’s dependence on foreign oil.

“It’s a major milestone in executing unit trains out of Aurora, eliminating obsolete single-car switching and moving Aventine assets into the highly efficient unit-train supply chain mode,” said Mark Beemer, Aventine’s president and CEO.

“Through a solid partnership with the BNSF, Aventine now has direct access from the BNSF mainline to our inner-loop unit-train track, using a newly installed mainline switch, track and a rail crossover built on Aventine’s land,” Beemer stated. “With our ability to produce 155-million gallons of ethanol, additional economics will be driven by quicker and more efficient moves of ethanol trains into large unit-train consumptive end markets.”

Two years ago, Beemer and the Aventine management team devised a strategic plan to logistically derisk the facility from adverse local conditions. Tactics deployed beyond the rail upgrades include installing four new truck scales, two new grain-grading labs and additional corn storage.

With unit-train capacity, Beemer noted, “Aventine is excited about opening new 100-car unit train markets.” In addition to Birmingham these include Watson, California; Chicago and East St. Louis, Illinois; and Dallas, Houston, Deer Park, Fort Worth, Beaumont and Texas City, Texas.

In Aurora Aventine operates the Aurora West 110-million-gallon Delta T facility and the Nebraska Energy LLC Vogelbusch 45-million-gallon dry mill plant. “By restarting both plants and making $20 million in efficiency upgrades, Aventine has been able to create local jobs in Aurora and contribute to the Nebraska economy while also providing local Aurora farmers with higher values for their corn and supplying local cattle feeders with competitively priced dried and wet distillers grain,” Beemer added. The company has hired 83 employees to date for an annualized payroll of $5.4 million.

In Pekin, Illinois, the company’s headquarters, Aventine operates two plants: a 60-million-gallon dry mill and a 100-million-gallon wet mill.

For more on BNSF, read a Special Report on BNSF’s little-known passenger service.

© 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.

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BH Media

BH Media Group Picks Up Oklahoma Publications

(BRK.A), (BRK.B)

BH Media Group has added six Oklahoma weekly community newspapers, and one Tulsa-based business daily, to its growing print media empire.

The acquisitions come only three weeks after it acquired the Franklin News-Post, which covers Rocky Mount, Virginia, and the Martinsville Bulletin, which covers Martinsville, Virginia.

The Tulsa Business & Legal News, Broken Arrow Ledger, Sand Springs Leader, Coweta American, Wagoner Tribune, Owasso Reporter, and the Skiatook Journal were all acquired from Community Newspaper Holdings of Montgomery Alabama.

Each of the newspapers has a website in addition to its print version.

The seven newspapers purchased by BH Media give it a greater reach in the Oklahoma market, which already includes its ownership of the Tulsa World, the second highest circulation paper in the state after The Oklahoman.

The Tulsa Business & Legal News is a daily paper that focuses on business news, happenings and profiles in Green County. It publishes a print and digital version and runs the website TulsaBusiness.com. According to the paper, 79% of its readers have an income of over $100,000.

The six weekly’s circulations are all small, with the largest being the Broken Arrow Ledger at 22,500. The others are the Sand Springs Leader (circulation 4,500), Coweta American (circulation 3,000), Wagoner Tribune (circulation 4,000), Owasso Reporter (circulation 5,100), and the Skiatook Journal (circulation 2,800).

A Focus on Community News

BH Media Group focuses on community newspapers, which report on local government, police and fire calls, high school news and sports, community events, and operate in a different niche than major market newspapers.

BH Media Group currently has a portfolio of 73 newspapers and other titles located in 10 states, including Alabama, Florida, Iowa, Nebraska, New Jersey, North Carolina, Oklahoma, South Carolina, Texas and Virginia. They also operate WPLG-TV, an ABC affiliate in Miami, FL.

BH Media Group does not have a national news gathering operation. It uses wire service for national news, but does cover regional news and state governments, sharing that information across its newspapers.

To read a Special Report on BH Media Group’s revenues and acquisition strategies see BH Media Finds Multiples Success.

© 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 Heads to Europe with Poland Deal

(BRK.A), (BRK.B)

Berkshire’s Dairy Queen currently has over 6,400 Dairy Queen stores in the United States, Canada and 26 other countries, but it doesn’t have any in Europe.

Zero, zip, nada.

That’s about to end as the Dairy Queen® system has inked a deal for its first locations in Poland.

Why Poland?

“Poland is a country with a robust and stable economy while still having strong growth potential for international brands. In searching for a new opportunity, we were looking for a solid partner who was ready to enter the Polish market,” said Wojciech Siwiec, General Manager of Sparrow 4 Sp. Z.O.O. “We are excited to partner with the Dairy Queen system, whose significant experience and know-how provides a strong foundation for success. We are looking forward to a good collaboration in launching the DQ brand in Poland.”

The initial DQ Grill & Chill and DQ Treat locations in Poland will open in the spring of 2015 in the greater Warsaw metro region.

Expansion Into Eastern Europe

“Our strategy is to open franchises in emerging markets,” Dairy Queen’s president and CEO John Gainor says. “That’s why Poland is a logical choice. We are avoiding countries such as France where the competition is very well established.”

Poland is just the beginning, according Dairy Queen’s Jean Champagne, Chief Operations Officer — International Groups.

“This move is strategic. We are entering the Eastern European market at a time when Western brands are being embraced by a consumer base that is well informed on the importance of global brands,” Champagne said. “We look forward to working with a strong franchise partner in Poland. We see this as a launching pad for other contiguous countries in the region.”

DQ’s International Expansion

While Dairy Queen continues to grow in the U.S., with stores in Manhattan and surrounding boroughs opening last year, the international business has been particularly robust, with 1,426 locations, and over 600 stores in China alone.

Middle East expansion have been particularly aggressive, with Saudi Arabia on track to open 32 locations by 2015 through franchisee Al Safwa Food Group. The largest DQ Grill & Chill restaurant in the world is in Riyadh, Saudi Arabia. Kuwait locations are owned by Khaled For Foodstuffs Co., a subsidiary of KMGC, and UAE locations are owned by U.S.-based International franchise company Bajco Group.

Dairy Queen doesn’t want to do its international expansion piece meal, and is looking for franchisees with the strength to take on whole countries.

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
BNSF Special Report

Special Report: Passenger Service Little Known Part of BNSF

(BRK.A), (BRK.B)

With the founding of Amtrak in 1971, most people have assumed that the major class 1 railroads, which include Berkshire Hathaway’s wholly-owned BNSF, got out of the passenger rail business.

The exodus was logical, as post WWII passenger service had become a tremendous money drain with the advent of jet air travel and the building of the interstate highway system. That one-two punch sent ridership plunging.

But Not So Fast

While it is true that long distance passenger rail service is now the purview of Amtrak, BNSF still moves over 27 million passengers a year in regional passenger rail service that includes Chicago, Seattle, and Minneapolis. Chicago alone has more than 25 million passengers annually served by 106 BNSF trains.

BNSF’s role in each region is different. For example, in Minneapolis, BNSF provides the locomotives, and the Metropolitan Council, the regional governmental agency, owns the rolling stock and provides train crews.

In Chicago, BNSF operates the trains and leases the equipment under a purchase of service agreement to METRA, the commuter rail division of the Regional Transportation Authority of the Chicago metropolitan area.

In Seattle, Sounder commuter rail is operated by BNSF on behalf of Sound Transit.

In all these cities, commuter rail helps reduce congestion on local highways. A single bi-level commuter rail car can carry as many passengers as 120 automobiles, and a train produces less emissions than an equivalent number of automobiles.

Ensuring a Profitable Business Model

What all the commuter lines have in common is they are all profitable for BNSF. Commuter rail is still just a small part of BNSF’s overall business, but BNSF has laid out a list of Commuter Rail Principles that keep it profitably in the commuter rail business:

• Any commuter operation cannot degrade BNSF’s freight service, or negatively affect BNSF’s freight customers or BNSF’s ability to provide them with service.

• BNSF must be compensated for any and all costs incurred in providing commuter service and must make a reasonable return for providing the service.

• Capital investments necessary for commuter service are the responsibility of the public, including investments for future capacity.

• BNSF will not incur any liability for commuter operations that it would not have but for those operations. These operations are provided by BNSF primarily as a public service.

• Studies of how commuter service might be provided must take into account not only the current freight traffic levels, but also projected freight traffic growth.

•Investments made for commuter projects must not result in BNSF incurring a higher tax burden.

• BNSF must retain operating control of rail facilities used for commuter service. All dispatching, maintenance and construction must be done under the control of BNSF.

• Studies must reflect BNSF’s actual operating conditions and cost structures.

• BNSF will limit commuter operations to the commuter schedules initially agreed upon. Future expansions will have to undergo the same analysis and provide any required capital improvements.

•Improvements must include grade-crossing protection and intertrack fencing as required to minimize the risk of accidents.

Commuter rail is not BNSF’s only connection to passenger service. In addition to the passenger service provided directly by BNSF, some 64 Amtrak trains operate daily on over 6,500 miles of BNSF host track.

© 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

Jordan Latest Country in Dairy Queen’s Middle East Expansion

(BRK.A), (BRK.B)

There will soon be a Blizzard in Jordan. The country is the latest addition to Dairy Queen’s Middle East expansion that already includes locations in Bahrain, Brunei, Egypt, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

SKM Franchise Co. LTD will launch a minimum of 10 DQ locations within the first five years of its recently signed long-term agreement.

The company’s first of five DQ Grill & Chill restaurants will open in late 2015.

The Nafal brothers, who lead SKM Franchise Co. LTD, have more than 20 years of retail development experience. In 2005, they opened El Rancho Supermercado, which grew into a chain of 16 supermarkets in Texas, with 6 stores in Dallas. They also own La Bodega, a food distribution company.

“We are very excited and enthusiastic about introducing the DQ brand to Jordan,” said Mario Nafal. “It’s a powerful global brand with a strong heritage. Jordanians will soon become part of the legion of fans the DQ system has around the world. We look forward to this tremendous opportunity.”

DQ’s International Expansion

Berkshire Hathaway’s Dairy Queen® system currently has 6,400 Dairy Queen stores in the United States, Canada and 26 other countries. The international business has been particularly robust, with 1,426 locations, including over 600 stores in China alone.

Middle East expansion have been particularly aggressive, with Saudi Arabia on track to open 32 locations by 2015 through franchisee Al Safwa Food Group. The largest DQ Grill & Chill restaurant in the world is in Riyadh, Saudi Arabia. Kuwait locations are owned by Khaled For Foodstuffs Co., a subsidiary of KMGC, and UAE locations are owned by U.S.-based International franchise company Bajco Group.

Dairy Queen doesn’t want to do its international expansion piece meal, and is looking for franchisees with the strength to take on whole countries.

For more on Dairy Queen, 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.