Buffett Bags His Elephant

Wide-moat-rated  Berkshire Hathaway (BRK.A) (BRK.B) ended up paying a little less than we had anticipated for narrow-moat-rated  Precision Castparts , with the deal being consummated for $32.4 billion, or $235 per share. Including the assumption of debt, the transaction is valued at about $37.2 billion. We had expected Berkshire to pay as much as a 25% premium to Precision Castparts' closing stock price Friday of $193.88 per share. It ended up paying a 21% premium. This is also 11% higher than our own $212 fair value estimate for Precision Castparts, which should be viewed as a control premium. Warren Buffett is likely to take some flak for paying a premium for Precision Castparts, given his reputation for buying things on the cheap, but it should be remembered that the acquired company's common stock price has declined 19% year to date and is down 15% year over year, as decreased demand for oil and gas equipment has affected overall sales.

Much like Berkshire's purchase of BNSF in 2009 and initial stake in Heinz in 2013, both of which were perceived to be situations where the company was overpaying (vis-a-vis Buffett's longstanding reputation as a value investor), this deal signifies the Oracle of Omaha's evolution from buying fair businesses at wonderful prices to buying wonderful businesses at fair prices. We view Precision Castparts as one of the latter; it has historically traded at a significant premium to its peers, but has traded off during the past year as declining demand for oil and gas equipment has affected overall sales. We expect this transaction to have a positive impact on our valuation for Berkshire, which did not use any stock or debt to fund the deal and has been earning next to nothing on its $60 billion-plus cash hoard. We do not, however, expect the full impact on our Berkshire fair value estimate to be greater than 10%.

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