понеделник, 11 януари 2010 г.

Buffett’s Kraft Rebuke Signals Berkshire Closer to Full Value

Jan. 11 (Bloomberg) -- Warren Buffett, who scolded Kraft Foods Inc. over its plan to issue stock for an acquisition, is using shares of his Berkshire Hathaway Inc. to pay for his biggest buyout. The apparent inconsistency may signal that Berkshire’s shares are more fully valued than Kraft’s.


Buffett wants to issue about $10 billion of Berkshire stock to help finance the $26 billion acquisition of railroad Burlington Northern Santa Fe Corp. As the largest investor in Kraft, Buffett registered Berkshire’s 138 million votes against the foodmaker’s plan to fund its bid for Cadbury Plc, saying that Kraft’s shares are worth more than their current price suggests. Neither takeover target, he has said, is coming cheap.

“It does seem to raise a contradiction,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.

“He may be thinking that Berkshire shares are less undervalued than Kraft.”


Kraft stock is “very expensive currency,” Buffett said in a statement last week. Still, the billionaire takeover expert is planning to fund the Burlington Northern deal with Berkshire stock that’s fallen by a third from its 2007 high to $100,300 on Jan. 8.

That’s led analysts and Charles Ortel of Newport Value Partners to ask why Buffett is willing to issue so many Berkshire shares.


“You don’t sell stock if you think it’s at a low, you sell stock if you think it’s fully valued,” said Ortel, managing director of New York-based Newport, who has advised clients to bet against Berkshire.

“He could certainly raise the money without equity if he wanted to.”



No Bargain


Berkshire isn’t getting “a bargain” in the Burlington Northern deal, Buffett told Charlie Rose in an interview on PBS in November.

Still, the railroad’s stock may be cheap enough to justify using Berkshire shares that trade for less than their true value, said Tom Russo, partner at Gardner Russo & Gardner, which has an investment in Omaha, Nebraska-based Berkshire.


“I think it says he believes he’s getting one heck of a deal at the price agreed upon for Burlington,” Russo said in an interview.

The Burlington Northern offer “is sufficiently undervalued to justify issuing shares of stock, which is something he’s long avoided.”

The railroad fell about 15 percent to $76.07 in the 12 months before Buffett agreed to pay $100 a share.



‘True Business Value’


Buffett said in the statement last week that when evaluating acquisitions, “the true business value of what is given is as important as the true business value of what is received.”

Berkshire reserved the right to reverse its decision on the Kraft vote when the foodmaker announces its final Cadbury offer, which is expected by Jan. 19.

A vote by Berkshire shareholders on a 50-for-1 split of the company’s Class B stock and an increase in the authorized number of shares is scheduled for Jan. 20.


Buffett declined to comment through his assistant, Debbie Bosanek.

Buffett, who is chairman and chief executive officer of Berkshire, has refused in the past to answer shareholders’ questions about the value of Berkshire shares.


“You can ask me almost anything, but that’s one I never answer,” Buffett, 79, said in an interview with Bloomberg Television last year.

“I never tell people to buy or sell Berkshire. I’ve never sold a share myself, I would tell you that.”


Two analysts tracked by Bloomberg have price forecasts on the stock averaging $125,000.

A third, Meyer Shields of Stifel Nicolaus & Co., said in an interview he expects the stock to reach $113,000 in 12 months.



Worst Year in Decade


Buffett’s acquisitions and stock picks propelled Berkshire’s shares to an increase of more than 30 fold in 20 years.

He’s finding it harder to maintain that pace as his company expands from insurance to energy and manufacturing.

Berkshire advanced 2.7 percent on the New York Stock Exchange last year, compared with the 23 percent rise in the Standard & Poor’s 500 Index, the company’s worst performance against the index in 10 years.


Investors last week paid $1.23 for every $1 of net assets Buffett and Vice Chairman Charles Munger, 86, have assembled at Berkshire over four decades.

That’s about 7 percent more than the figure for the financial companies in the S&P 500. Berkshire’s multiple to book value, or assets minus liabilities, has averaged 1.76 over that past 15 years, compared with 2.17 for the S&P 500 financial firms.


“The market doesn’t seem to appreciate Berkshire’s growth and value as much as it used to,” said Morningstar Inc.’s Bill Bergman, a Chicago-based analyst, who estimates Berkshire shares to be worth $131,000 each.

The company “has been built up by Warren Buffett and Charlie Munger to be something that will live beyond their years, and that’s something I think the market hasn’t appreciated.”



Compounding an Error


Buffett has warned investors about the dangers of stock- fueled takeovers.

He typically shuns debt financing too, preferring to shop with cash from stock dividends and bond coupons from Berkshire’s investment portfolio, and earnings from businesses he’s already acquired.

Revenue from Geico car insurance and Dairy Queen ice cream helped Buffett pay $4 billion for Israeli toolmaker Iscar Metalworking Cos. in 2006.


He’s called his all-stock purchase of shoemaker Dexter in 1993 a waste of shareholder funds, saying that the advantages he thought the company had over rivals quickly vanished.

Using $433 million of Berkshire shares, Buffett wrote in his 2007 annual report, “compounded this error hugely.”



‘Worthless Business’


“That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion,” he wrote.

“In essence, I gave away 1.6% of a wonderful business - one now valued at $220 billion - to buy a worthless business.” 

Berkshire’s market capitalization has since fallen to about $155 billion.


Buffett again used stock in the 1998 takeover of insurer General Re for about $18 billion. Berkshire shares closed at a then-record high of $80,900 less than an hour before the two companies announced the agreement.

The stock fell 27 percent in three months and didn’t recover to its record for five years.


While on the board of Coca-Cola Co., Buffett helped scuttle the soft-drink company’s proposed $15.3 billion stock swap for Quaker Oats, the maker of Gatorade, in 2000.

Buffett, whose company still owns Coca-Cola shares, argued the price was too high because it meant giving up more than 10 percent of the soft-drink maker, board member James Williams said in an interview about three years later.


“From time to time he issues his own stock,” said Guy Spier, principal at hedge fund Aquamarine Funds LLC, which owns Berkshire shares.

“But he really doesn’t like it when other companies issue their own stock.”



‘Blank Check’


Kraft offered a mixture of cash and stock for Cadbury, the Uxbridge, England-based maker of Creme Eggs and Trident gum, in a deal it values at about 10.6 billion pounds ($17 billion).

Last week, Buffett said the equity financing plan amounted to a “blank check,” enabling Kraft CEO Irene Rosenfeld to increase the offer without further shareholder approval. Cadbury has called the bid insufficient.


Kraft stock has fallen about 17 percent in the two years ended Dec. 31, and Buffett chided Rosenfeld for seeking to issue equity below the $33 price at which the firm repurchased shares in 2007.

Berkshire owns about 9.4 percent of Kraft’s stock.


Kraft rose 5.5 percent in the four trading days since Buffett’s announcement, while Cadbury has slipped 3.4 percent on speculation that a higher bid is less likely to emerge.

Buffett has called the Burlington Northern deal an “all-in wager” on the U.S. economy that brings about 37,000 workers and a share of a regulated industry.

Berkshire expects to own the railroad for the next century and get “a decent return,” Buffett told Charlie Rose.

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