Buffett/Berkshire - general news

[nwoodman]

Morningstar’s Greg Warren on the Alleghany deal

 

“We expect to increase our fair value estimate for Berkshire Hathaway (BRK.B)
by 3%-5% following news that the wide-moat firm has agreed to acquire the
outstanding equity of Alleghany, a property/casualty insurer with reinsurance
and specialty insurance lines, for $11.6 billion. While the deal seems pricey at
first glance, with Berkshire offering $848.02 per share in cash for Alleghany--a
29% premium to Alleghany's average stock price over the last 30 days (and a
16% premium to the firm's 52-week high closing price)-the acquisition price
works out to a multiple of 1.26 times Alleghany's book value per share at the
end of 2021. Berkshire has been buying back its own common stock for an
average of 1.37 times prior quarter book value per share the past year, so a
premium that lifts the deal price for Alleghany up to 1.26 times book seems
reasonable to us from a price perspective.

That said, we'll have to see how much value Berkshire can extract from
Alleghany's insurance operations, noting that insurance deals can be tricky as
the acquirer is assuming potential future claims established by the acquired
firm's past underwriting. While Alleghany's inability to generate excess returns
on a consistent basis could be a sign of underwriting weakness, we'd note
that the firm's reinsurance arm (which can be hit with large catastrophe losses
at any given time) have had a greater influence on overall results the past
decade. We'll also have to see how Berkshire handles the investment portfolio
at Alleghany, which has been dedicated more to bonds (80%-85% of holdings
the past two years) than equities (15%-20%), the complete opposite of
Berkshire's insurance operations (which has had 80%-85% invested in
equities). Should Berkshire avoid unforeseen underwriting issues and
reallocate the acquired investment portfolio to more lucrative options, this
could end up being a good deal (something Berkshire has struggled to find for
much of the past decade).”

[ValueMaven]

The deal isnt pricey at all imho.  Not sure what he is looking at?!

[ValueMaven]

Finally had a chance to read through the 10K and the 2021 annual letter.  This is a really nice acquisition for Berkshire on several fronts.

[HeadOfLeverage]

20 hours ago, ValueMaven said:

The deal isnt pricey at all imho.  Not sure what he is looking at?!

It's quite price to pay a premium to book for a business which generally haven't been able to reach 10%+ ROE imo. But with the assumption of moving the bonds into equities over time it looks like a bargain. Not sure how aggressive you should be there given how long BRK's cash pile has been laying around.  

[ValueMaven]

Everyone is saying how inactive Buffett has been and focusing on the cash pile.  I totally disagree.  Over the last 6 years you've had: PCP deal ($30B), D pipeline transaction ($10B), Buybacks ($50B), OXY loan/equity stake ($10B preferred plus another $7 in equity), and the pending Y transaction ($12B).  

[gfp]

Alleghany trading up above the deal price with a Barron's article speculating there could be other bidders.  Berkshire has been outbid on TransRe before, I suppose history could repeat itself.  

 

BTW - I thought I posted here last night but it is deleted.  Maybe because the site was down?

[ValueMaven]

I dont see another bidder coming through - although I could be wrong.  I think the rise in Y's price was driven by ETF flows.  Look at the trading pattern in the stock.  Also the size wasnt that large.  

[Munger_Disciple]

The possibility for a competing bid for Y is very low IMO. There are many reasons for this: (1) Y has a longer duration bond portfolio that will be marked to market when it announces Q1 results and the bond portfolio losses will not look pretty. So effectively Berkshire is likely paying slightly higher price to Q1-22 book than the reported 1.26 number based on Q4-21 book value,  (2) Historically the offered price to book for Y is at the very high end of its market valuation over the last 10 years, (3) The reality is that Y is a better business as a part of Berkshire than as a stand-alone business. It has been a low ROE business for a long time as they were forced to hold lots of bonds (with very low coupons) to match their insurance liabilities. Once  Y becomes part of the mother ship, they wouldn't have to do it and finally (3) Ajit & Warren are as smart as they come. They know all this and that's why there is no break-up fee. 

 

IMO this is a rare deal that is good for both buyers and sellers. Both sides are very smart so that's what we should expect. 

Edited March 27, 2022 by Munger_Disciple

[gfp]

So Berkshire, and it looks like Warren from the filing, bought over 11% of HPQ.  Having not looked at HPQ since sometime around the Compaq merger I was surprised to see how profitable they are and, of course, a large share repurchase program + dividend.  Obviously the pandemic created a boom for them.

 

Another surprising move from Buffett - he is willing to go above 10% more and more these days.

 

https://www.sec.gov/Archives/edgar/data/47217/000089924322014160/xslF345X03/doc4.xml

 

https://roic.ai/classic/HPQ

[sleepydragon]

19 minutes ago, gfp said:

So Berkshire, and it looks like Warren from the filing, bought over 11% of HPQ.  Having not looked at HPQ since sometime around the Compaq merger I was surprised to see how profitable they are and, of course, a large share repurchase program + dividend.  Obviously the pandemic created a boom for them.

 

Another surprising move from Buffett - he is willing to go above 10% more and more these days.

 

https://www.sec.gov/Archives/edgar/data/47217/000089924322014160/xslF345X03/doc4.xml

 

https://roic.ai/classic/HPQ

I forgot this company still exist..

Maybe they have some hidden assets, like billions of semi conductors in some warehouses??

[Gamecock-YT]

8 P/E. 2.7% divy, high ROIC, buying back lots of shares, large enough market cap to make a decent impact. Makes sense.

[Ulti]

Tracy Cool's 2nd annual letter

https://mcusercontent.com/64e1b84729b4195a49b750934/files/d432d3ac-e0b3-fa65-05f5-783b4ab1ca20/Kanbrick_Annual_Letter_2021_vFF.pdf

[Spekulatius]

On 4/7/2022 at 12:33 AM, Gamecock-YT said:

8 P/E. 2.7% divy, high ROIC, buying back lots of shares, large enough market cap to make a decent impact. Makes sense.

If you believe that HPQ business mean reverts, since the pandemic is over, then he bought $4B in pre tax income for a ~$40B EV, which is not that attractive, since HPQ isn’t growing.

 

High ROIC doesn’t really help if HOQ can’t invest incremental capital because it isn’t growing. Buffet must be seeing something else under the hood.

Edited April 9, 2022 by Spekulatius

[Minseok]

cant help but tie in my intel thesis here (for fun so take it or leave it)

Here is a growth thesis for HP (and it is similar for Dell): 

Intel processors post 2016  has not improved much and i think it has contributed to the slowing/lowering sales of PC's. I literally can do everything at satisfactory speed on a 2016 PC compared to a PC i buy today. WIth future processors being leaps and bounds better, and with a huge replacemnent cycle coming i think they will grow. The current laptop supply rate for schools for example is absymally low. Pat has mentioned that they also see material increase in the markets going forward according to their PC forecasts.

 

Also, just as apple is driving new mac sales with hardware acceleration on media/AI and other specialized functionality, with similar features for x86 road maps, and consider that there will always be afew PC users for every apple users, its an aspect of sales.

 

And when the FAANGs increase their capex (which they are doing now) they are buying racks from HP/DELL/Lenovo.

 

Also the purchase is eerily close to the recent plantornics deal. HP buys Plantronics in US$3.3 billion deal - Infobae. Perhaps a play on the remote working trend/metaverse pivot.

 

Havent run the numbers, but with such a low cost, above deals are probably all positives.

 

[gfp]

Preliminary merger proxy is out for the Alleghany deal (still not a done deal, go-shop period ends midnight on the 14th) - for those curious how it came together, search for "Background of the Merger" in the document (or actually it might automatically go right there with this link).  Buffett had dinner with Joe Brandon in NYC.  Wonder if he was back in Omaha by bedtime.

 

https://www.sec.gov/Archives/edgar/data/0000775368/000114036122013997/ny20003698x1_prem14a.htm#tBOM

Edited April 11, 2022 by gfp

[ValueMaven]

 

[Poor Charlie]

1 hour ago, gfp said:

Preliminary merger proxy is out for the Alleghany deal (still not a done deal, go-shop period ends midnight on the 14th) - for those curious how it came together, search for "Background of the Merger" in the document (or actually it might automatically go right there with this link).  Buffett had dinner with Joe Brandon in NYC.  Wonder if he was back in Omaha by bedtime.

 

https://www.sec.gov/Archives/edgar/data/0000775368/000114036122013997/ny20003698x1_prem14a.htm#tBOM

Suprised Buffett never pushed for a deal-break fee. They're effectively giving Alleghany a free put option until the shareholder vote. 

 

I don't expect this deal to close. It's like Buffett wants Berkshire to be the stalking horse for an Alleghany auction.

[MarioP]

12 hours ago, Poor Charlie said:

Suprised Buffett never pushed for a deal-break fee. They're effectively giving Alleghany a free put option until the shareholder vote. 

 

I don't expect this deal to close. It's like Buffett wants Berkshire to be the stalking horse for an Alleghany auction.

Perhaps that was the condition for him to not pay for the broker. "they are useless. you will never get a better deal than this..I'm ready to let you shop around but you'll have to pay for it.."

[Ulti]

https://www.bnnbloomberg.ca/buffett-s-11-6-billion-deal-started-with-a-dinner-in-new-york-1.1750940

[Ulti]

https://podcasts.apple.com/us/podcast/tip438-berkshire-hathaway-masterclass-w-chris-bloomstran/id928933489?i=1000556846453

[dcollon]

Thanks for posting these Ulti 

[jbwent63]

14 hours ago, Poor Charlie said:

Suprised Buffett never pushed for a deal-break fee. They're effectively giving Alleghany a free put option until the shareholder vote. 

 

I don't expect this deal to close. It's like Buffett wants Berkshire to be the stalking horse for an Alleghany auction.

No break fee gave the offer more weight in the eyes of the board and GS. It also seems consistent with the knowledge that BH will not engage in an auction. Take it or leave it. Minimal costs incurred by BH (I hope WEB didn't pay for dinner!!!). Allegheny attempted to get a better deal but was denied by WEB. It shows how nimble this company and its advisors are. I would be surprised to see a superior offer.

[ValueMaven]

Looks like the Y deal will all but close.  Go Shop ends tonight at Midnight EST.  No one is willing to outbid Berkshire here esp given the mark-to-market losses on the fixed income portfolio in 1Q.  The Agg had its worst quarter in 40 years down -6% !! 

[Poor Charlie]

2 hours ago, ValueMaven said:

Looks like the Y deal will all but close.  Go Shop ends tonight at Midnight EST.  No one is willing to outbid Berkshire here esp given the mark-to-market losses on the fixed income portfolio in 1Q.  The Agg had its worst quarter in 40 years down -6% !! 

The deal closes after an Allegheny shareholder vote. Until then, they can accept competing offers (with no deal-break fee paid to Berkshire).

[thepupil]

2 hours ago, ValueMaven said:

Looks like the Y deal will all but close.  Go Shop ends tonight at Midnight EST.  No one is willing to outbid Berkshire here esp given the mark-to-market losses on the fixed income portfolio in 1Q.  The Agg had its worst quarter in 40 years down -6% !! 

 

While i think it's highly likely to go to Berkshire, I have not seen an announcement regarding the results of the go shop (which should come tomorrow or Monday). Right?