Warren Buffett said shareholders of his Berkshire Hathaway Inc. (BRK/A) may have their financial interests harmed by the company’s planned stock-and-cash deal to take a 100 percent stake in Wesco Financial Corp. (WSC)
Using Berkshire stock would dilute investors’ holdings in exchange for more ownership in a firm that may have less growth potential, Buffett told Wesco Director Carolyn Carlburg in a Jan. 21 letter published today in a Berkshire regulatory filing. Berkshire, the top investor in Kraft Foods Inc., last year opposed the foodmaker’s plan to issue shares for an acquisition, saying the stock was “very expensive currency.”
Buffett rebuffed a request by Carlburg for a higher offer, according to correspondence between the two included in the filing. Wesco, which is led by Berkshire Vice Chairman Charles Munger and is 80.1 percent owned by Buffett’s firm, said last month it accepted a deal of about $550 million for the remaining stake and would seek shareholder approval. Wesco investors would have the option of taking cash or Berkshire stock in exchange for their shares.
“We regard the transaction as disadvantageous to Berkshire if a substantial number of Wesco shareholders elect to take Berkshire stock,” Buffett said in the letter. “That’s because I believe the prospects for Berkshire shares over the next 10 years to be considerably better than the prospects for Wesco shares.”
Buffett funded more than a third of last year’s $26.5 billion purchase of railroad Burlington Northern Santa Fe by issuing Berkshire shares. “I hate it,” Buffett said in an interview last year when asked about diluting Berkshire shares.
Berkshire has gained about 2.1 percent on the New York Stock Exchange in the past 12 months, compared with a decline of about 1.8 percent in Wesco. Omaha, Nebraska-based Berkshire trades at about 1.34 times its book value, a measure of assets minus liabilities, according to Bloomberg data. Wesco trades at its book value, the price which Buffett set as his target for the bid. Pasadena, California-based Wesco rose 2 cents to $389 at 4:15 p.m.
“I may be wrong in my assessment of the prospects for Berkshire, Wesco or both,” Buffett said in the letter. “But since I feel that the shareholders of Berkshire will be economically disadvantaged by the shareholders of Wesco who take Berkshire shares, I’m unable to change the terms of our offer.”
Buffett, 80, is seeking to simplify Berkshire’s holdings for an eventual change in leadership. The billionaire has led the company for four decades with the help of Munger, Buffett’s 87-year old business partner. Munger supported the buyout and said on Jan. 18 that he doubted Berkshire would raise the bid, according to the filing.
Carlburg, a director since 1991, was seeking an increased offer because Wesco’s reported book value understated the firm’s worth, she told Buffett in a Jan. 20 letter, disclosed in the filing. Carlburg, Robert Flaherty and Elizabeth Caspers Peters were appointed by Wesco’s board in September to a “special committee of independent directors” to evaluate the bid.
A review of Wesco’s deferred-tax liabilities could add as much as $17 a share because payments aren’t immediately due, Carlburg said in her letter. She identified an additional $3 a share tied to Wesco’s real estate and a further $7 a share related to discounting reserves and receivables in the firm’s insurance business, according to the letter.
“If our offer is unacceptable, I would suggest that all work in respect to our proposal should be terminated immediately so as to avoid incurring any further expenses,” Buffett said in his reply the next day.
Berkshire took majority control of Wesco in 1983 and transformed the company from a California lender into a unit that stores steel, rents furniture and sells insurance to banks and airlines. Greenhill & Co., the New York-based investment bank advising Wesco on the buyout, was told by Munger in a Jan. 18 meeting that the outlook for the company’s businesses made a deal with Berkshire attractive for investors.
Munger “expressed skepticism about the future prospects of the company’s insurance business and the future performance and value of CORT,” Wesco’s furniture-rental unit, according to an account in the filing of discussions with Greenhill. “Mr. Munger also expressed his view that for a long-term investor, exchanging Wesco shares for Berkshire shares on the merger terms offered would be a very sound idea.”
Greenhill requested five-year projections from the management of Wesco units including CORT, Wesco Financial Insurance Co. and Precision Steel Warehouse Inc. The request was rejected by the insurance unit.
“Wes-FIC does not prepare financial projections in the ordinary course and would not do so solely for the purpose of the contemplated transaction,” according to the filing, which summarized remarks made by Robert Denham, a Wesco director, on Nov. 17. “Any such projections would be highly speculative and unreliable,” given the 2012 expiration of a contract with Swiss Reinsurance Co. that provides most of the unit’s premiums.
Denham, the former Salomon Inc. chairman and CEO, is also a partner at Munger, Tolles & Olson LLP, the law firm that represented Berkshire in its Wesco bid.
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