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Weschler Rise From Grace Leads to Role Advising Buffett

Photographer: Jen Fariello via Bloomberg

The ability to find value in distressed companies helped Ted Weschler, investment manager at Berkshire Hathaway Inc., carve out a role at Berkshire that goes beyond the stock-picking job he was hired for. Close

The ability to find value in distressed companies helped Ted Weschler, investment... Read More

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Photographer: Jen Fariello via Bloomberg

The ability to find value in distressed companies helped Ted Weschler, investment manager at Berkshire Hathaway Inc., carve out a role at Berkshire that goes beyond the stock-picking job he was hired for.

Ted Weschler’s first job after college was at chemical maker W.R. Grace & Co. (GRA) In 2007, six years after the company filed for bankruptcy, his hedge fund held 15 percent of the shares. That’s when he called Joe Rice.

Rice, a South Carolina lawyer, represented workers who claimed asbestos products manufactured by Grace had caused cancer and other illnesses. The 158-year-old company, which once owned shipping lines and restaurants, declared bankruptcy in 2001 under the weight of those lawsuits. Rice was at an impasse with the firm when Weschler suggested they meet.

Over a three-hour dinner at Charleston’s Oak Steakhouse, the men started a conversation about resolving the case in a manner that would be fair to workers and shareholders. Weschler picked up the check. His initiative paved the way for a settlement a year later that helped Grace’s stock climb 40-fold since the bankruptcy and an investing record that earned him a job at Warren Buffett’s Berkshire Hathaway Inc. (BRK/B)

“He understood the issues for my clients weren’t all dollars and cents,” Rice said. “He was a catalyst.”

That ability to find value in distressed companies and cut deals helped Weschler, 51, carve out a role at Omaha, Nebraska- based Berkshire that goes beyond the stock-picking job he was hired for. Since joining Buffett’s firm in January, he has made a bid for a bankrupt mortgage business, negotiated a transaction that pushed Berkshire deeper into newspaper publishing and consulted with the heads of the company’s operating units.

Expanding Role

Buffett said in July that Weschler and Todd Combs, Berkshire’s other investment manager, each probably would oversee a $4 billion portfolio, up from about $2.75 billion at the beginning of the year. While it’s too early to evaluate Weschler’s performance, his expanding role and experience show why he could one day be a candidate to run the company that Buffett, 82, built over four decades through stock picks and acquisitions, said Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life.”

“Warren keeps describing him as an investment manager, but the reality is his skills are more comparable to those of Warren himself,” said Schroeder, who’s also a Bloomberg View columnist. “He has a background in broad capital management, including private equity, mergers and acquisitions, owning businesses and being directly involved in their management.”

Buffett said last year that Ajit Jain, 61, his reinsurance lieutenant, probably would have the board’s support to be the next chief executive officer if he were interested in the job. Burlington Northern Santa Fe railroad CEO Matt Rose, 53, Geico’s Tony Nicely, 69, and MidAmerican Energy Holdings’ Greg Abel, 50, also are among the company’s top managers, overseeing some of the largest units.

Charlottesville Fortune

Parallels between Weschler and his boss come easy. Like Buffett, he was fixated on making money from an early age and has cultivated an investing style that relies on patience, an encyclopedic knowledge of company financials and interest in a range of industries, according to interviews with more than a dozen friends, former colleagues and business acquaintances.

He also amassed a fortune far from Wall Street, spending most of his three-decade career in Charlottesville, Virginia, where he helped establish a private-equity firm in 1989 and later started a hedge fund. Buffett moved Berkshire to his childhood home of Omaha and kept it there as the company expanded to employ more than a quarter of a million people and its value rose to more than $220 billion.

ResCap Auction

Weschler, who declined to comment for this story, may make his biggest mark yet on the billionaire’s firm this week at an auction for bankrupt mortgage lender Residential Capital LLC’s most valuable assets. Winning them would give Buffett another platform to originate loans and a chance to benefit from servicing real-estate debt as the housing market rebounds.

Berkshire in June sought to become the lead bidder for ResCap’s mortgage operation and loan portfolio. Buffett’s firm won the right for the latter by offering $1.45 billion, trumping what ResCap’s parent, Ally Financial Inc. (ALLY), agreed to pay when the mortgage lender entered bankruptcy.

Nationstar Mortgage Holdings Inc. beat Berkshire for the right to bid first on the mortgage business with an agreement valued at about $2.3 billion, the mortgage servicer said in a regulatory filing last month. Berkshire hasn’t said publicly whether it would make another offer.

Weschler is handling negotiations for Buffett’s firm, according to a person familiar with his work who wouldn’t be identified because the process is private. Lawyers and advisers for the lender and eligible bidders on the mortgage business are set to meet tomorrow in New York. ResCap will select the best offers for the assets and seek approval from a judge.

Media General

Weschler, who splits his time between Charlottesville and Omaha, also helped Buffett on a deal to buy 63 newspapers, including the Richmond Times-Dispatch, from Media General Inc. (MEG) and refinance its debt. The transaction, completed in June, allowed the company to focus on its 18 television stations.

Buffett asked the investment manager to analyze the ability of Media General’s broadcast business to handle its debt if Berkshire bought the print publications, Weschler told C-Ville Weekly, a Charlottesville newspaper, in May. He served as Berkshire’s lead negotiator on the newspaper purchases and financing, which included a $400 million term loan due in 2020 that pays 10.5 percent interest, according to Lou Anne Nabhan, a spokeswoman for the Richmond, Virginia-based media company.

The debt provides some assurance Berkshire will make money on the deal even if the newspapers struggle, said Ken Doctor, an analyst at Outsell Inc., a Burlingame, California-based research firm focused on the publishing industry.

“It’s the surest part of the deal, as long as you think that the broadcast properties are fairly stable,” he said.

Above Bookstore

Weschler, a director of Wilmington, Delaware-based WSFS Financial Corp. (WSFS), has collaborated on deals with the heads of Berkshire’s operating units and helps review possible takeover targets, according to a person familiar with his role who declined to be identified because the matter is private.

Behind-the-scenes work is fitting for someone whom friends and associates say enjoys privacy. While he has given money to Charlottesville nonprofits and his high school, Cathedral Preparatory School in Erie, Pennsylvania, he doesn’t seek attention for most of his philanthropy, according to five people with knowledge of his contributions.

He ran his hedge fund, Peninsula Capital Advisors LLC, which had about $2 billion in U.S. stockholdings, from a two- room office above a bookstore in Charlottesville. His work attire often was a short-sleeve shirt and shorts, according to Michael David, a former colleague and friend who now runs a hedge fund in Akron, Ohio. And while he has driven BMWs for some time, he keeps the cars for seven or eight years, David said.

‘Still Stunned’

Weschler lives with his wife, Sheila, and two children on a 104-acre farm outside Charlottesville that he bought in 2004 for $5.5 million, according to county property records. He sold another house in the city for $1.2 million in April.

“He’s still stunned by the fact that he’s become incredibly wealthy,” said Hawes Spencer, whom Weschler backed when he started a weekly paper in Charlottesville called the Hook in 2002. “If I saw a Rolex on his wrist, I would faint.”

Friends and associates said Weschler, a native of Buffalo, New York, whose father was an A&P grocery-chain executive, long had a desire to make money. In his middle-school yearbook, he said he wanted to be a millionaire, according to Chris Hagerty, director of advancement at Cathedral Prep. In high school, he sold cigars to classmates traveling to watch their basketball team compete for the state championship, Hagerty said.

Competing Returns

Weschler, who completed marathons in New York and Boston, has a competitive streak. When he managed Peninsula, he would vie with his friend Mark Schoeppner to see who could produce the best returns at their respective funds. Annual results were posted on a plaque in the winner’s office, according to a person familiar with the competition. Weschler closed his fund before joining Berkshire.

Like Buffett, Weschler sought an edge by studying company filings and dozens of other publications. The former hedge-fund manager once told David that he didn’t make an investment unless he had spent 500 hours studying the idea.

“He’d go on vacation and take 10-Ks and 10-Qs with him,” said David, referring to the annual and quarterly reports publicly traded companies file to the U.S. Securities and Exchange Commission. “He still does.”

Data Driven

The passion for data is shared by Buffett, who has said he doesn’t need to discuss investments with executives at companies in Berkshire’s stock portfolio. The billionaire has quipped that he follows regulatory filings like some men read Playboy.

Weschler “finds it almost a distraction” to meet management, said Ed Shapiro, a hedge-fund manager who has known Weschler for about a decade and invested in similar companies. “But he’s formed these very strong feelings about certain managers” from reading the reports, listening to conference calls and studying other public information.

Shapiro said Weschler usually won their friendly competition to see who could get into the office earliest to look at the quarterly filings of Dish Network Corp. (DISH), which both held in their hedge funds. The report usually arrived at about 6 a.m. on the U.S. East Coast.

That approach may have helped Weschler land his role investing a portion of Berkshire’s $86.2 billion equity portfolio. It didn’t hurt that he won charity auctions in 2010 and 2011 for meals with Buffett, bidding $2.63 million each time. Weschler’s donations were made anonymously and disclosed by Fortune magazine after he got the job.

Some of Weschler’s hedge-fund holdings have shown up among Berkshire’s investments since the announcement of his hiring, including stakes in Liberty Media Corp. (LMCA) and DaVita Inc. (DVA) Both companies’ shares are up about 45 percent this year, triple the Standard & Poor’s 500 Index (SPX)’s 14 percent advance.

‘Learning Experience’

The origins of some of Weschler’s most successful bets as a hedge-fund manager can be traced to the 1980s, when he worked at Grace after earning a bachelor’s degree at the University of Pennsylvania’s Wharton School.

The DaVita holding was informed by one of his first Grace assignments, working on the 1984 acquisition of National Medical Care Inc., a provider of kidney-dialysis services, according to a person with knowledge of the investment.

During due diligence for the deal, Weschler caught the attention of Terry Daniels, then vice chairman of Grace, for the way he asked questions of a top National Medical executive, said Ed Harvey, a former Grace executive.

Quad-C

Weschler’s role in that deal led to a two-year stint as assistant to J. Peter Grace, who ran the firm for more than four decades. The role entailed attending every budget and operating review meeting with the industrialist and evaluating capital requests from heath care, restaurant, retail, natural resources and chemicals operations, according to Daniels.

“It was a tremendous learning experience,” Daniels said. “You got to see executives and how they responded.”

When Daniels started a private-equity firm now called Quad- C Management Inc. in Charlottesville in 1989 focusing on buyouts of mid-size firms, Weschler joined him.

Investors in the company’s early funds had to hand over money upfront, which meant Quad-C could buy public securities before completing takeovers. In addition to working on deals, Weschler oversaw the portfolio that included distressed bonds and equities.

He left Quad-C in 1999 to start Peninsula. Like Buffett, Weschler concentrated his investments in a handful of companies, many of which he held for years. At the end of the second quarter last year, before Berkshire announced Weschler’s hiring, his fund’s U.S. stock portfolio was spread across just nine firms, filings show. Peninsula had five of those stocks three years earlier. The fund gained more than 1,000 percent from 2000 to 2011, a period in which the S&P 500 Index fell.

US Airways

In 2005, Peninsula joined Shapiro’s PAR Capital Management Inc. in backing America West Holdings Corp.’s merger with US Airways Group Inc. (LCC) that helped the latter airline out of bankruptcy. Weschler’s fund invested $60 million for a 5.8 percent stake in the combined company, which kept the US Airways name. The transaction also relied on funds from sources such as Airbus SAS and Air Canada parent ACE Aviation Holdings Inc.

“Ted seemed to like that complexity,” said US Airways CEO Doug Parker. “The fact that it was complex was appealing to him, and I think he sees that’s where he’s got an edge.”

US Airways shares more than quadrupled to $63.27 at their peak in November 2006 from $15, the price Peninsula paid. The gains were short-lived. Rising jet-fuel prices and lower travel demand during the U.S. recession that began in December 2007 caused airline shares to plummet. US Airways fell as low as $1.45 in July 2008.

Saving Grace

PAR sold most of its stake by the middle of 2007, according to regulatory filings, when the shares still traded above $25. Weschler’s fund held on, beginning to sell its holdings in early 2008 and fully divesting by the end of March 2009, filings show. US Airways stock averaged $7.21 during that period.

Other bets were more successful. By April 2001, weeks after Grace declared bankruptcy, Weschler had amassed a 10.1 percent stake in the Columbia, Maryland-based firm, according to filings. The holding climbed to about 15 percent that year.

Weschler realized that Grace had a strong underlying business and a management that had the expertise and willingness to fight in court, said David Bernick, a partner at Boies, Schiller & Flexner LLP who represented the company in the bankruptcy and related civil and criminal suits when he worked at the law firm Kirkland & Ellis LLP.

“Ted was prepared to stick it out” and ignore all the day-to-day noise surrounding the bankruptcy, said Bernick.

Opportunistic Investing

The 2008 agreement called for trusts to take responsibility for present and future asbestos claims. It didn’t wipe out shareholders and allows for unsecured creditors to be paid with interest. The plan won approval from a federal bankruptcy judge in 2011 and from a U.S. district judge this year. Some creditors have appealed, demanding higher interest rates.

Grace was among the largest contributors to Peninsula’s returns. The 3.74 million shares Weschler personally owned as of last December, according to a regulatory filing, would be worth about $228 million at the Oct. 19 closing price.

Opportunistic, distressed investing would help “round out the role” of a future Berkshire CEO (BRK/A), said Schroeder. The board probably has another candidate in mind to replace Buffett if an immediate successor is needed, though Weschler could be a longer-term choice if he proves himself, she said.

“Ted would be good at anything he does,” said David, the Akron-based hedge-fund manager. “In his mind, he’s there to produce great investment results for the company. That’s it. He has no ambitions beyond that, as far as I know.”

Following Buffett

Buffett has said that his roles will be divided after he leaves Berkshire. The board has chosen a CEO candidate and has two back-ups if needed, the billionaire wrote in a letter to shareholders in February, without identifying the individuals. He has said his son, Howard, a Berkshire director since 1993, could be non-executive chairman.

Weschler and Combs, 41, who each get a base salary of $1 million a year and can earn more based on their returns, have the kinds of “business minds” that will help the next CEO weigh acquisitions, Buffett said in the letter. He didn’t respond to a request to comment sent to an assistant.

As CEO, Buffett has served as Berkshire’s chief capital allocator and advised managers of the company’s more than 70 operating units on major acquisitions and projects. Weschler’s experience suggests he could succeed Buffett in that role, said Tom Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, which oversees about $6 billion and counts Berkshire shares among its largest holdings.

‘Valuation Skills’

“Ted’s probably pretty good at that because he has valuation skills and he has deal skills,” said Russo. “The capacity to serve in a transactional way is extremely valuable.”

Regardless of Weschler’s future role, takeovers are becoming increasingly important to Berkshire, said Schroeder. The company generated more than $12 billion in free cash flow last year, according to data compiled by Bloomberg, and doesn’t pay dividends.

“Unless Berkshire becomes an enterprise that simply distributes its cash flows, if it’s going to continue growing, they need someone who has the ability to make acquisitions, negotiate deals, evaluate where acquisitions would fit in the broad context of Berkshire,” said Schroeder. “That requires a lot of sophistication.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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