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Berkshire acquisition of Pilot Flying J - long term 80 per cent


John Hjorth
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Placeholder for discussion of the Berkshire Pilot Flying J aquisition.

 

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Quite some posts about this Berkshire aquisition in the general news topic as by now. I think it deserves its own separate topic.

The economics are still to be determined, but I was surprised that BRK would touch Pilot after the criminal trouble the company ran into cheating customers of rebates.  Haslam has not yet been charged, so likely won't, but the pleas ran to nearly the top of the corporate chain and with the summer plea bargains in exchange for cooperation, I had thought there may be more charges forthcoming.  Maybe BRK has reason to believe the matter is concluded.  In fact, maybe that's part of the timing of the deal. 

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The economics are still to be determined, but I was surprised that BRK would touch Pilot after the criminal trouble the company ran into cheating customers of rebates.  Haslam has not yet been charged, so likely won't, but the pleas ran to nearly the top of the corporate chain and with the summer plea bargains in exchange for cooperation, I had thought there may be more charges forthcoming.  Maybe BRK has reason to believe the matter is concluded.  In fact, maybe that's part of the timing of the deal.

 

I know that people want to believe that Warren and Charlie only invest in morally impeccable businesses, but between DVA, HCG, and this... Just like anyone else, a good deal is the overriding concern.

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I have tried to find some financial data about the company, but basically to no avail.

 

The only thing I found was this page on Forbes.

 

I suppose the company has a lot of real estate on its balance sheet.

 

Furthermore, I have been thinking about the accounting treatment of this investment. With an ownership stake at approx. 39 per cent, I think it will be one line consolidation as accounting principle, like for KHC, but not with a separate line in the Berkshire group balance sheet because of its minor size.

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Furthermore, I have been thinking about the accounting treatment of this investment. With an ownership stake at approx. 39 per cent, I think it will be one line consolidation as accounting principle, like for KHC, but not with a separate line in the Berkshire group balance sheet because of its minor size.

Normally this acquisition would be accounted under the equity method. However in this case I think the accounting method will be determined by the nature of the contract under which the extra shares will be required. This is really going deep, deep into GAAP minutia and I don't think anyone can tell how it will be accounted without seeing the actual agreement.

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gg & xo 1,

 

Sound sceptisism has never hurt anyone. There was a link to an interview with Mr. Buffett here on CoBF yesterday, where Mr. Buffett mentioned, that he was aware of that case.

 

Do you have some sources to share, to drag us all out of our ignorance?

Here is a link to a Department of Justice news release: https://www.justice.gov/usao-edtn/pr/pilot-flying-j-enters-criminal-enforcement-agreement

 

Here is a link to a local Tennessee paper with an update:  http://www.knoxnews.com/story/news/crime/2017/07/25/whos-still-headed-trial-pilot-flying-j-case/506800001/

 

I live in Cleveland (where Mr. Haslam owns the NFL Cleveland Browns), so it was a very large story locally. 

 

With respect to BRK investing in other ethically questionable companies, perhaps, although I believe Pilot is different than buying a publicly traded stock in that this will be a wholly owned subsidiary eventually and the case is still playing out.  As best I can tell, the initial thoughts that criminal charges would reach the CEO and ownership are not going to play out.  Perhaps WEB knows enough to say for sure.  But that was the biggest surprise from my perspective - this could end up with BRK buying into a private business where it needs promptly to replace management and that I didn't see that discussed by analysts.  And it could be that the risk is priced into the deal, but until we know pricing for the deal, I don't know what to make of that. 

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Thank you, scorpioncapital,

 

I found it: Omaha World-Herald: Warren Watch: In contest to pick next $5 billion-plus purchase by Warren Buffett, no one saw this comming.

 

The article refers to a Bloomberg article, which is here: Bloomberg: Buffett's Berkshire Hathaway Buys Stake in Pilot Flying J.

 

In the article:

 

Financial terms of the deal weren't disclosed, but the Bloomberg Billionaraires Index values the business at $9.1 billion, and calculates the Haslam family's 50.1 percent stake at $4.5 billion.
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  • 1 month later...

gg & xo 1,

 

Sound sceptisism has never hurt anyone. There was a link to an interview with Mr. Buffett here on CoBF yesterday, where Mr. Buffett mentioned, that he was aware of that case.

 

Do you have some sources to share, to drag us all out of our ignorance?

Here is a link to a Department of Justice news release: https://www.justice.gov/usao-edtn/pr/pilot-flying-j-enters-criminal-enforcement-agreement

 

Here is a link to a local Tennessee paper with an update:  http://www.knoxnews.com/story/news/crime/2017/07/25/whos-still-headed-trial-pilot-flying-j-case/506800001/

 

I live in Cleveland (where Mr. Haslam owns the NFL Cleveland Browns), so it was a very large story locally. 

 

With respect to BRK investing in other ethically questionable companies, perhaps, although I believe Pilot is different than buying a publicly traded stock in that this will be a wholly owned subsidiary eventually and the case is still playing out.  As best I can tell, the initial thoughts that criminal charges would reach the CEO and ownership are not going to play out.  Perhaps WEB knows enough to say for sure.  But that was the biggest surprise from my perspective - this could end up with BRK buying into a private business where it needs promptly to replace management and that I didn't see that discussed by analysts.  And it could be that the risk is priced into the deal, but until we know pricing for the deal, I don't know what to make of that.

 

Haslam sounds complicit to me, listening to today's summary from the Knoxville News Sentinel reporter:

https://www.yahoo.com/sports/jury-fraud-case-hears-jimmy-183908147.html  (follow the video update link)

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  • 2 months later...

Today I have tried to find some information about this acquisition in the 2017 Annual Report, outside the Shareholder Letter. Not much that I've found so far - perhaps something has skipped my attention here outside the Shareholder Letter.

 

Page K-99: The contractual obligation to buy [80 minus 38.6] percent at a later moment. It's mentioned that the annual sales is about USD 20 B.

 

I discussed earlier in this topic with rb how the accounting treatment of this investment would go. If one study the minority interest in the specication of the equity movements during 2017,  it can be observed, that there are no material additions to minority interests related to acquisitions. So I conclude, that this investment must be contained in "Other assets" under "Insurance and Other" [With no note to that post in the balance sheet], most likely accounted for under use of the equity method [to the opposite of line-by-line consolidation under the use of the past equity method].

 

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Somehow I find it a bit funny that buying 38.6 percent of a company with a turnover of USD 20 B now simply drowns in the Berkshire numbers. [Again, something may have skipped my attention.]

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  • 4 weeks later...

That's in the ballpark of what I was assuming.  Pretty reasonable if you assume they are making somewhere around $500 million each year, 14-15x earnings for the first chunk.  Implied market cap will probably be higher for the next shares that Berkshire buys, likely based on some pre-established formula based on earnings like the Marmon deal.  If they had auctioned or shopped the entire thing with a banker it would have gone for more

 

 

 

October 03, 2017, 06:19:03 AM

Could be $8 Billion valuation for the whole thing.  Not sure.  Sales will be much higher than market cap for a company in that business.  It probably makes at least $500 million net each year, but I don't have a source for accurate numbers.

 

October 03, 2017, 06:06:25 AM

It may be 5 or 6 Billion dollars for the entire company.  38% could be $2.25 Billion, the eventual 80% $5 Billion or so.  With few other acquisitions this quarter and what I assume to be a quick closing with Byron as the investment banker and one of the sellers, we will probably find out what Berkshire paid in the annual report cash flow statement.
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