Four Deals Primed for Warren Buffett's $40 Billion War Chest
NEW YORK (TheStreet) -- As Berkshire Hathaway's
From large stock buys such as a $10.7 billion purchase of IBM
The latest results from Berkshire released last Friday reported cash up from $37 billion to $40 billion at the end of the second quarter. Additionally, the fact that Berkshire sold $3 billion worth of stock in the second quarter gave Buffett watchers just enough information to make the suggestion that he could be selling stock in plans to finance a major transaction.
Bloomberg speculated earlier this year -- after Berkshire's annual meeting -- that Deere
Meanwhile, others wonder whether a string of minor-sized newspaper purchases will preempt a larger deal for the New York Times Company
At this time last year, Berkshire's cash swelled to $47.9 billion only to fall back below $40 billion after it plowed over $9 billion in cash to buy chemicals giant Lubrizol in early 2011.
Meanwhile, after posting strong earnings growth from most businesses in the second quarter, Berkshire may need a next big investment idea to make use of recovering earnings at some housing-related units and growing revenue in new operations like Burlington Northern and Lubrizol.
For instance, Burlington Northern revenue climbed from nearly 7% to $5.1 billion in the quarter, and its earnings were higher by $110 million versus the year-ago quarter.
Berkshire's manufacturing, retail and services business saw across the board increases in revenue versus the prior year. Housing related earnings from Acme Building Brands, Benjamin Moore (paint), Johns Manville (insulation), Shaw (carpets) and MiTek (roofing) were also part of a manufacturing group that saw revenue increase 35% and earnings go higher by 56% versus the year ago period.
In light of the improving Berkshire earnings and the massive cash hoard, here's a look at some unconventional deals that Berkshire could target in coming quarters, as its cash swells to what could be uncomfortable levels.
A wireless bet on DISH Network
Berkshire Hathaway is noticeably underexposed to the telecommunications sector and the global smartphone boom that may put iPhones and Google
DISH and its visionary co-founder and chairman Charlie Ergen are at a developed but still uncertain stage in a plan to build a national wireless service, which could fit within Buffett's buyout and capital expenditure parameters.
After spending years scavenging bankruptcy courts for spectrum -- government regulated airwaves that smartphone data runs over -- Ergen and DISH have some of the best unused wireless assets in the industry, which could be used to build a national mobile broadband network to challenge the likes of Verizon and AT&T. However, DISH's strategy of pushing into the wireless market after building a satellite TV powerhouse carries large risks, including key pending regulatory approvals and the prospect of billions in capital expenditure needed for a build out.
It's the latter capex needs of DISH's prospective wireless strategy where Buffett and Berkshire may have a comparative advantage over just about every other investor. If DISH's wireless assets were approved by the Federal Communications Commission for development -- a decision is expected in the Fall -- Berkshire could plow billions of its excess cash into the development of the network -- with the prospect that the spending initiative could out earn the S&P 500 Index in coming years, as wireless networks hit a capacity crunch.
For Buffett, wireless appears to be a classic business "moated" from competition -- his favorite type of business -- and it would also be a convincing investment in U.S. infrastructure. Few companies have the stomach to enter the wireless business because of the likely tens of billions in capital expenditure needed to build a national network to challenge AT&T or Verizon. Nevertheless, President Obama and the FCC have made it a priority to solve what's expected to be a giant data crunch in coming years, and wireless upstarts appear to be an obvious solution.
In a DISH investment, Buffett could also resort to his traditional value investing discipline and analysis. After acquiring 40 megahertz frequencies from bankrupt industry players DBSD and TerreStar for a combined $3 billion in recent years, DISH's wireless assets may be worth roughly the same as the company's recurring satellite TV business, which currently has over 14 million subscribers, churns out billions in annual free cash flow, and earned $14 billion in revenue and turned a $1.5 billion profit in 2011.
In the first quarter, Berkshire quadrupled its investment in DISH competitor DirecTV
At a market cap of $13.72 billion as of Monday's close, DISH would be digestible for Berkshire and well below the $22 billion that Buffett was willing to spend on his mystery 2011 deal.
Buying out the U.S. Treasury's stake in General Motors
During the financial crisis, Warren Buffett played hero to the U.S. financial system, taking multi-billion dollar preferred share stakes in Goldman Sachs
While Goldman Sachs and General Electric have since paid their way out of Buffett's bailout, the Treasury is yet to fully exit its investment in AIG and General Motors. Buffett could buy the Treasury's shares in either company, in stock investments that may be poised for future gains after a government exit.
Earlier in August, the Treasury said it would sell a fourth tranche in AIG shares for $5 billion, paring its stake in the bailed out insurer to 53% or roughly $30 billion. While that's down from the 92% stake that Treasury took in AIG as part of its record $182 billion bailout, it likely remains far too large for the government's tolerance. Meanwhile, AIG, which is instituting a multi-billion dollar share buyback program to absorb some of the Treasury's shares, likely doesn't yet have the earnings to purchase many more shares.
With the Treasury set to break even on any AIG share sale at a price $29 or above, Buffett could buy stock at what may be a discounted price that would benefit from AIG's future earnings, which look bright after the insurer reported a strong second quarter earlier in August. In fact, it is the government's stake in AIG and its eventual sale, which may be the biggest current headwind to the company's shares.
A full stake buyout of AIG shares would likely cost in excess of $30 billion, making the deal large even for Berkshire, especially considering its large insurance exposure. Instead, Berkshire could also target some of AIG's soon-to-be divested assets like its aircraft lending arm International Lease Finance Corporation -- supplementing Berkshire's NetJets airplane unit -- or it could target other parts of the Treasury' stock portfolio.
After investing in General Motors in the first quarter, Buffett could build his stake in the recovering automaker by bidding for part or all of Uncle Sam's 26.5% stake in GM, worth $8.25 billion, as of Monday's close.
Currently, GM's shares are near post-IPO lows as a sovereign debt crisis looms large over the automaker's European earnings. Still, with many U.S. buyers expected to use low interest rates to replace what is the oldest U.S.-wide fleet of cars on record, GM could be on the precipice of a renaissance. Were Buffett to expect a European resolution and a cycle of economic growth in the U.S., GM could be a classic value investment, especially as the Treasury tries to put bailouts in its rear view mirror.
For more on AIG, see TheStreet Ratings' report card for the stock.
Buffett bulks up in utilities
Buffett and his top lieutenant Charlie Munger noted at the company's annual meeting that the company's utility arm, MidAmerican Energy, would look to spend $100 billion in the next 10 to 15 years, making utilities an obvious but unheralded part the company's future M&A plans.
While much of that spending is likely to consist of capital expenditure as the cash-intensive utility business serves as a return-generating sink for all that Berkshire cash, the $100 billion estimate leaves room for strategic deals, and could fit with MidAmerican's recent acquisitive ways. Berkshire could swallow an additional utility company, like PG&E
In recent years, MidAmerican Energy has tried to cut large utilities deals, offering $4.7 billion for Constellation Energy
Recently, MidAmerican Energy cut multiple deals to buy solar energy plants being built by First Solar
At a market cap of over $18 billion, PG&E would be right at Berkshire's "elephant gun" parameter, while NRG's near-$5 billion market cap would be easily digestible.
For MidAmerican, the move into solar energy isn't so surprising. MidAmerican is the largest wind energy provider in the U.S. and expects to generate nearly 30% of its capacity from renewable sources by the end of 2012.
For more on utilities M&A, see Fitch Ratings' pick of 10 dividend rich, deal ready utility stocks.
Berkshire rails into coal players Peabody Energy
For investors in the coal sector, even a focus on best of breed industry players like Peabody Energy
In buying railroad giant Burlington Northern Santa Fe, Buffett became highly exposed to the U.S. coal industry, which uses railroads like BNSF, Union Pacific
Companies like Peabody and Cloud Peak with heavy exposure to profitable coal mines in regions like the Powder River Basin of Wyoming may be poised for a pick-up in shipments that would supplement BNSF's and Berkshire's earnings. If Buffett were to be convinced either of the economics of thermal coal or the continued Chinese demand for met coal, which needs to be transported to the West Coast for export, a coal based acquisition might be well-timed vertical integration for Berkshire.
Still, a coal investment would carry significant risk for Buffett, who normally is a conservative investor even when targeting value stocks. Some analysts say that in spite of share losses that shaved between 30% and 50% off of most coal sector stocks, the sector may yet face headwinds and Buffett isn't in the business of catching falling knives.
For more on coal investments, see why China risk is bigger than bankruptcy fears and why old king coal is headed to the retirement home.
See why Warren Buffet shuns investment banks for more on other Berkshire investments.
-- Written by Antoine Gara in New York