{"id":165014,"date":"2010-01-11T01:46:00","date_gmt":"2010-01-11T06:46:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-5999735155183386531"},"modified":"2010-01-11T01:51:42","modified_gmt":"2010-01-11T06:51:42","slug":"businessweek-buffett%e2%80%99s-kraft-rebuke-signals-berkshire-closer-to-full-value","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/165014","title":{"rendered":"BUSINESSWEEK: Buffett\u2019s Kraft Rebuke Signals Berkshire Closer to Full Value"},"content":{"rendered":"

January 11, 2010, 12:18 AM EST<\/p>\n

<\/span>\"Fishpond\"<\/a>
SPONSOR<\/span>
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By Andrew Frye<\/p>\n

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\u2019s shares are more fully valued than Kraft\u2019s.<\/p>\n

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\u2019s 138 million votes against the foodmaker\u2019s plan to fund its bid for Cadbury Plc, saying that Kraft\u2019s shares are worth more than their current price suggests. Neither takeover target, he has said, is coming cheap.<\/p>\n

\u201cIt does seem to raise a contradiction,\u201d said David Kass, a professor at the University of Maryland\u2019s Robert H. Smith School of Business. \u201cHe may be thinking that Berkshire shares are less undervalued than Kraft.\u201d<\/p>\n

\u201cIt does seem to raise a contradiction,\u201d said David Kass, a professor at the University of Maryland\u2019s Robert H. Smith School of Business. \u201cHe may be thinking that Berkshire shares are less undervalued than Kraft.\u201d<\/p>\n

Kraft stock is \u201cvery expensive currency,\u201d Buffett said in a statement last week. Still, the billionaire takeover expert is planning to fund the Burlington Northern deal with Berkshire stock that\u2019s fallen by a third from its 2007 high to $100,300 on Jan. 8. That\u2019s led analysts and Charles Ortel of Newport Value Partners to ask why Buffett is willing to issue so many Berkshire shares.<\/p>\n

\u201cYou don\u2019t sell stock if you think it\u2019s at a low, you sell stock if you think it\u2019s fully valued,\u201d said Ortel, managing director of New York-based Newport, who has advised clients to bet against Berkshire. \u201cHe could certainly raise the money without equity if he wanted to.\u201d<\/p>\n

No Bargain<\/p>\n

Berkshire isn\u2019t getting \u201ca bargain\u201d in the Burlington Northern deal, Buffett told Charlie Rose in an interview on PBS in November. Still, the railroad\u2019s 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.<\/p>\n

\u201cI think it says he believes he\u2019s getting one heck of a deal at the price agreed upon for Burlington,\u201d Russo said in an interview. The Burlington Northern offer \u201cis sufficiently undervalued to justify issuing shares of stock, which is something he\u2019s long avoided.\u201d The railroad fell about 15 percent to $76.07 in the 12 months before Buffett agreed to pay $100 a share.<\/p>\n

\u2018True Business Value\u2019<\/p>\n

Buffett said in the statement last week that when evaluating acquisitions, \u201cthe true business value of what is given is as important as the true business value of what is received.\u201d<\/p>\n

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\u2019s Class B stock and an increase in the authorized number of shares is scheduled for Jan. 20.<\/p>\n

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\u2019 questions about the value of Berkshire shares.<\/p>\n

\u201cYou can ask me almost anything, but that\u2019s one I never answer,\u201d Buffett, 79, said in an interview with Bloomberg Television last year. \u201cI never tell people to buy or sell Berkshire. I\u2019ve never sold a share myself, I would tell you that.\u201d<\/p>\n

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.<\/p>\n

Worst Year in Decade<\/p>\n

Buffett\u2019s acquisitions and stock picks propelled Berkshire\u2019s shares to an increase of more than 30 fold in 20 years. He\u2019s 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\u2019s 500 Index, the company\u2019s worst performance against the index in 10 years.<\/p>\n

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\u2019s about 7 percent more than the figure for the financial companies in the S&P 500. Berkshire\u2019s 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.<\/p>\n

\u201cThe market doesn\u2019t seem to appreciate Berkshire\u2019s growth and value as much as it used to,\u201d said Morningstar Inc.\u2019s Bill Bergman, a Chicago-based analyst, who estimates Berkshire shares to be worth $131,000 each. The company \u201chas been built up by Warren Buffett and Charlie Munger to be something that will live beyond their years, and that\u2019s something I think the market hasn\u2019t appreciated.\u201d<\/p>\n

Compounding an Error<\/p>\n

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\u2019s investment portfolio, and earnings from businesses he\u2019s 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.<\/p>\n

He\u2019s 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, \u201ccompounded this error hugely.\u201d<\/p>\n

\u2018Worthless Business\u2019<\/p>\n

\u201cThat move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion,\u201d he wrote. \u201cIn essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.\u201d Berkshire\u2019s market capitalization has since fallen to about $155 billion.<\/p>\n

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\u2019t recover to its record for five years.<\/p>\n

While on the board of Coca-Cola Co., Buffett helped scuttle the soft-drink company\u2019s 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.<\/p>\n

\u201cFrom time to time he issues his own stock,\u201d said Guy Spier, principal at hedge fund Aquamarine Funds LLC, which owns Berkshire shares. \u201cBut he really doesn\u2019t like it when other companies issue their own stock.\u201d<\/p>\n

\u2018Blank Check\u2019<\/p>\n

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 \u201cblank check,\u201d enabling Kraft CEO Irene Rosenfeld to increase the offer without further shareholder approval. Cadbury has called the bid insufficient.<\/p>\n

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\u2019s stock.<\/p>\n

Kraft rose 5.5 percent in the four trading days since Buffett\u2019s announcement, while Cadbury has slipped 3.4 percent on speculation that a higher bid is less likely to emerge.<\/p>\n

Buffett has called the Burlington Northern deal an \u201call-in wager\u201d 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 \u201ca decent return,\u201d Buffett told Charlie Rose.<\/p>\n

–With assistance from Betty Liu and Zachary R. Mider in New York. Editors: Erik Holm, Dan Kraut<\/p>\n

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