Buffett/Berkshire - general news

[Xerxes]

It is an old episode but was informative when I listened to it last year  

[scorpioncapital]

didn't look at Y portfolio but is it similar to genre where they increased the cash equivalents portion of their float without the capital gains tax of selling shares with unrealized gains?

[gfp]

Ajit has been a big fan of TransRe for a long time and did a quota share with them last year.  Also, I don't think Buffett really wanted to fire Joe Brandon over that AIG "scandal."  I think Warren thought Berkshire/GenRe had accounted for the transaction properly but regulators wanted some heads on the Berkshire side as well.

 

FWIW, Alleghany Capital has a steel building/stadium subsidiary that built MSGE's Sphere.

 

Here is a recent investor presentation for Y:

https://s24.q4cdn.com/857140222/files/doc_financials/2021/q4/Alleghany-Corporation-Fourth-Quarter-Investor-Presentation.pdf

Edited March 21, 2022 by gfp

[mjm]

remember Y had huge position relative to their portfolio at one time in BNSF.

 

[gfp]

Alleghany trading up past the deal price - hopefully the go-shop doesn't put the company with someone else.  I just sold out of the Y shares I had at 852

[ValueMaven]

I'm a big fan of the deal and the price paid.  Glad it finally happened

[wabuffo]

I would like to point out that Buffett/BRK seems to buy these leveraged bond portfolios (ie, P&C insurers) at the tippy-top of aging, multi-decade bull markets right before big equity market declines.

 

1966- National Indemnity

1998 - Gen Re

2022 - Alleghany (?)

 

coincidence... or cue ominous sounding music....

 

 

Bill

Edited March 21, 2022 by wabuffo

[gfp]

This one seems pretty small to make much of a difference - 22 or 23 Billion in investments.  I have a feeling the phone rang and that is the extent of the timing.

[mjm]

Transatlantic Holdings, Inc. was a buyout target by BRK in 2012, but was trumped by Y after BRK refused to raise its offer( does it ever). Buffett is trying to get the whole enchilada 10 years later (unless someone offers more, in which case doubt he would raise his bid).

[gfp]

5 minutes ago, mjm said:

Transatlantic Holdings, Inc. was a buyout target by BRK in 2012, but was trumped by Y after BRK refused to raise its offer( does it ever). Buffett is trying to get the whole enchilada 10 years later (unless someone offers more, in which case doubt he would raise his bid).

 

I think that Transatlantic bid by Ajit was some sort of favor to Transatlantic management.  I forget the specifics but I don't think Berkshire was expecting to actually acquire the company - although they were certainly willing to at their bid price.  I'll have to look back into why I formed that opinion but I remember considering it a favor Ajit did for a respected colleague.

 

edit - maybe it was to keep Validus from getting Transatlantic?

Edited March 21, 2022 by gfp

[gfp]

47 minutes ago, gfp said:

This one seems pretty small to make much of a difference - 22 or 23 Billion in investments.  I have a feeling the phone rang and that is the extent of the timing.

 

I guess I was wrong on "the phone rang" part - Barrons has a source close to the deal reporting that Berkshire initiated the transaction.  

https://www.barrons.com/articles/berkshire-hathaway-deal-for-insurer-alleghany-is-great-for-berkshire-not-so-good-for-alleghany-51647877030

 

Quote

The Berkshire deal appears to have come about pretty quickly, which is typical for Buffett who tends to make rapid decisions. Berkshire as usual didn’t use an investment banker—reflecting Buffett’s disdain for them. Berkshire initiated the transaction talks, according to a person familiar with the deal. 

 

[sleepydragon]

58 minutes ago, wabuffo said:

I would like to point out that Buffett/BRK seems to buy these leveraged bond portfolios (ie, P&C insurers) at the tippy-top of aging, multi-decade bull markets right before big equity market declines.

 

1966- National Indemnity

1998 - Gen Re

2022 - Alleghany (?)

 

coincidence... or cue ominous sounding music....

 

 

Bill

Brk’s stock portfolio ‘s bond proportion increases as a result. 

[wabuffo]

This one seems pretty small to make much of a difference

 

That's the wrong way to look at it.

 

Bill

[ValueMaven]

I read the barrons article.  They suggested Markel could bid with stock.  I highly, highly doubt that happens. 

The article is a very interesting read.  

[gfp]

24 minutes ago, wabuffo said:

This one seems pretty small to make much of a difference

 

That's the wrong way to look at it.

 

Bill

 

What's the right way to think about it?  Alleghany has about a $16 Billion bond portfolio, FWIW.

[wabuffo]

What's the right way to think about it?

 

From the seller POV.

 

The sellers we're talking about are smart & and as they look out, they see falling bond prices (and equity values).  Not much fun when you are holding a large bond (and to some degree equity) portfolio.

 

Bill

Edited March 21, 2022 by wabuffo

[TREVNI]

By my math BRK is paying 0.89x float for Y. Not bad! And considering the deal doesn't close until the end of the year it's probably a price/book of about 1.15x. 

[sleepydragon]

Nice deal:

- Brk ends up with more cash after the deal then before the deal, if Buffett liquidate the bond portfolio

- got a great ceo that understands insurance 

- and of course a good business that he understands 

 

[Munger_Disciple]

3 hours ago, wabuffo said:

What's the right way to think about it?

 

From the seller POV.

 

The sellers we're talking about are smart & and as they look out, they see falling bond prices (and equity values).  Not much fun when you are holding a large bond (and to some degree equity) portfolio.

 

Bill

 

+1 

Excellent point Bill! It is quite possible that Y's Q1 results show losses (potentially large depending on their duration. I haven't looked at Y's most recent 10-K so I don't know) in their bond portfolio given the rapid rise in interest rates this year. It also explains why Berkshire is not asking for a break-up fee if Y finds another suitor. 

Ajit & Warren are as shrewd as they come and they think it is quite unlikely that Y will attract another suitor in 25 days which incidentally coincides with Q1 earnings season. 

Edited March 21, 2022 by Munger_Disciple

[scorpioncapital]

I'm surprised he didn't pick up AIG. A very large float. Mostly bonds. Derivative book completely clean now. Finally back to firing on all cylinders. Very streamlined. Maybe he's waiting for the life biz separation if he's gonna pounce on the p&c portion.

 

Edited March 21, 2022 by scorpioncapital

[Munger_Disciple]

1 hour ago, Munger_Disciple said:

 

+1 

Excellent point Bill! It is quite possible that Y's Q1 results show losses (potentially large depending on their duration. I haven't looked at Y's most recent 10-K so I don't know) in their bond portfolio given the rapid rise in interest rates this year. It also explains why Berkshire is not asking for a break-up fee if Y finds another suitor. 

Ajit & Warren are as shrewd as they come and they think it is quite unlikely that Y will attract another suitor in 25 days which incidentally coincides with Q1 earnings season. 

 

So I took at a quick look at Y's 2021 10-K. It looks like they have $15.7 B  fixed income securities out of which $5.5B have maturities exceeding 5 years and $3.7B have maturities between 1 and 5 years. Y has significant duration exposure which implies significant mark-to-market losses on FI portfolio in Q1. 

 

I love this deal! Berkshire gets float and great insurance executive talent. Relatively cheap. Plus Buffett will sell long dated bonds and uses the losses from FI portfolio to offset capital gains from elsewhere in Berkshire portfolio. And Y's large FI portfolio is not attractive to others so the probability of a competing offer is very low.  

Edited March 21, 2022 by Munger_Disciple

[Munger_Disciple]

Interesting details: https://www.bloomberg.com/news/articles/2022-03-21/buffett-thumbs-nose-at-goldman-bankers-with-quirky-deal-price

 

Quote

Berkshire had offered to pay $850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: An announced purchase price that subtracts roughly $27 million for Goldman -- calling attention to Buffett’s stand.

 

Edited March 22, 2022 by Munger_Disciple

[Xerxes]

So he is really swapping short-term duration money with [med/long-term duration money + management].  

question ?

 

i realize BRK is net buyer of its stock and he is no mood to issue stock to fund any purchase these days, …. but if he were to issue stock (b/c the seller hypothetically wanted a piece or be tax-efficient) and then buyback the said amount with BRK cash, are there major friction for BRK that would work against doing that ? 

[james22]

It will be interesting to see if the $16.1 billion fixed income book is immediately liquidated and added to Berkshire’s cash position when the transaction closes. If so, Berkshire will actually end up with more cash after the acquisition given that the deal is for $11.9 billion.

 

https://rationalreflections.substack.com/p/what-does-buffett-see-in-alleghany?token=eyJ1c2VyX2lkIjoxNzU0NjIxMSwicG9zdF9pZCI6NTA3NzQwOTUsIl8iOiJuQ3FmaSIsImlhdCI6MTY0NzkwODQyMiwiZXhwIjoxNjQ3OTEyMDIyLCJpc3MiOiJwdWItMTA5NzgzIiwic3ViIjoicG9zdC1yZWFjdGlvbiJ9.KMhRQoEK4bVVEiak-ghMa8duyB259HWYl5at8_f51aQ&s=r

[gfp]

Bloomberg has an article shedding some light on the odd 848.02 deal price:

-----------------------------------------------------------------------------

 

Warren Buffett is telegraphing his disdain for Wall Street bankers with an oddball price on his latest multibillion-dollar takeover.

The $848.02 for every share that Alleghany Corp. stockholders get from Berkshire Hathaway Inc. is the result of Buffett balking at the banking fee being set aside by the target company -- in this case for Goldman Sachs Group Inc., which is advising the insurer. 

 

Berkshire had offered to pay $850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: An announced purchase price that subtracts roughly $27 million for Goldman -- calling attention to Buffett’s stand.

The 91-year-old has historically expressed disdain for investment bankers, calling them among the expensive “money-shufflers” who “clamor to be fed” in his annual letter released in 2015. When he was a shareholder and director of Gillette Co., he pushed unsuccessfully in 1996 to slash such fees to Duracell International Inc.’s bankers as part of Gillette’s acquisition of the battery company.

Representatives for Goldman and Alleghany declined to comment. Buffett’s assistant didn’t immediately return a message seeking comment. 

 

 

The transaction is Berkshire’s largest since 2016, according to data compiled by Bloomberg. While deal prices typically reflect the back-and-forth between buyers and sellers, it gets smoothed over before the deal is struck. Most announcements are priced to avoid clunky numbers after both sides agree on a plan for how advisors are paid. A regulatory filing notes that the price would have been $850 per share but for the roughly $27 million fee paid to Goldman.

 

The Oracle of Omaha, known for his witty business aphorisms, rarely uses an investment bank with his deals, instead relying on Berkshire Vice Chairman Charlie Munger’s previous law firm, Munger, Tolles & Olson, to advise on acquisitions.

There have been exceptions. Byron Trott, a former Goldman Sachs Group Inc. banker who helped Buffett strike a deal to buy food distribution business McLane from Walmart Inc., was one of the rare bankers who won grudging respect from Buffett.

“He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee,” Buffett said in his letter released in 2004.

---------------------------------------------

 

From the Alleghany merger proxy:

"(a) Each Share issued and outstanding immediately before the Effective Time (other than any Shares to be cancelled pursuant to Section 2.1(b) and any Dissenting Shares) will be cancelled and extinguished and be converted into the right to receive $848.02 in cash, representing $850.00 per Share less the financial advisory fee due to the Financial Advisor in connection with the Merger, payable to the holder of such Share, without interest"

Edited March 22, 2022 by gfp