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Berkshire Adding DaVita Makes Pick Among Top at Firm

Berkshire Hathaway Chairman Warren Buffett
Berkshire Hathaway Inc. Chairman Warren Buffett has said that deputy stock pickers Ted Weschler and Todd Combs run their portfolios independently of him and that he decides which companies Berkshire buys. Photographer: Scott Eells/Bloomberg

Berkshire Hathaway Inc. has been buying about 1 million shares a month of dialysis-center operator DaVita HealthCare Partners Inc., making the holding among the dozen largest at Warren Buffett’s company.

Berkshire has accumulated 13.6 million shares, or about 13 percent, of DaVita from the end of September 2011 through Dec. 6, according to regulatory filings. The stake is valued at about $1.45 billion, twice as much as Omaha, Nebraska-based Berkshire’s position in Washington Post Co., one of Buffett’s longest-held investments.

Buffett’s firm benefited from DaVita’s 32 percent rally since the Denver-based company announced a deal in May to buy HealthCare Partners, a manager of physician networks. The bet has stoked speculation about whether Berkshire will take over the business, as it did after building equity stakes in railroad Burlington Northern Santa Fe and insurer Geico.

“Are they going to own 20 percent of this at some point?” said Kevin Ellich, a senior research analyst at Piper Jaffray Cos. “And then, if that’s it, is it end game?”

The HealthCare Partners deal helps an already “good-cash-flow business” and may aid DaVita as President Barack Obama’s overhaul of the U.S. medical system is implemented, he said.

Chief Executive Officer Kent Thiry, 56, built DaVita as rising obesity and diabetes rates led to a surge in the number of patients seeking care for end-stage renal disease, or kidney failure. With more than 1,900 outpatient clinics, the company is the second-largest U.S. provider of dialysis services and treats about one-third of all ESRD patients in the country.

Weschler’s Role

The DaVita holding probably was built by Ted Weschler, one of two stock pickers Buffett, 82, hired as part of a succession plan, Ellich said. The company was among the largest investments at Weschler’s hedge fund, Peninsula Capital Advisors LLC, before he joined Berkshire. His hiring was announced in September 2011 and Buffett’s firm had taken a 2.7 million-share stake by the end of that year.

Weschler helped with due diligence on an investment in dialysis provider National Medical Care Inc. when he was working for chemical maker W.R. Grace & Co. in the 1980s. In 1996, Grace merged NMC into Fresenius Medical Care AG, the world’s largest provider of kidney dialysis. Buffett didn’t respond to a request for comment sent to an assistant.

People receiving the most common treatment for ESRD, hemodialysis, typically make three visits a week to an outpatient clinic, where they are hooked up to a machine that filters toxins, fluids and salt from the blood.

Cash Flow

The federal government has covered most patients with ESRD since the 1970s, giving providers a dependable revenue source, said Dr. Tony Pfaffle, director of health care research at hedge fund Bearing Circle Capital LP. Along with drugs, hemodialysis cost about $88,000 per patient a year in 2010, according to the U.S. Renal Data System. Taxpayers’ price tag for ESRD patients ballooned to $33 billion that year.

DaVita’s free cash flow rose to $780 million in 2011, almost twice as much as 2009, as Thiry added dialysis centers.

“It would be a great cash-flow engine, in my opinion, for an acquirer,” Pfaffle said in a phone interview.

HealthCare Partners operates in states including California and Florida under a system that rewards lowering costs. That focus is a model for “where the puck is headed” for U.S. health care, Thiry said after announcing a cash-and-stock deal for more than $4 billion.

U.S. health care after Obama’s overhaul is “going to a place where the incentive is to control costs,” said Les Funtleyder, a fund manager at New York-based Poliwogg.

Stock Issuance

Still, DaVita faces legal challenges that may pressure the stock, said Funtleyder, who has written a book about investing in the industry. For years, the Justice Department has probed the company’s relationships with doctors as well as billing and administration of anemia drug Epogen.

The U.S. Attorney’s Office in St. Louis ended an inquiry started in 2005 without filing any charges, DaVita said in October. Other probes have been disclosed, though none have resulted in proceedings against the company, according to its most recent quarterly filing.

Jim Gustafson, a spokesman for DaVita, declined to comment on Berkshire’s purchases. The company closed yesterday at $106.49, giving it a market value of about $11 billion, including the 9.38 million shares issued as part of the HealthCare Partners deal.

Berkshire’s initial DaVita holding was acquired at about $74 a share in 2011, according to data filed with insurance regulators. Berkshire paid more than $112 for some shares last month.

Business Minds

Buffett has said that Weschler and fellow investment manager Todd Combs run their portfolios independently of him and that he decides which companies Berkshire buys. He has also said that the stock pickers have the kinds of “business minds” that could help the next Berkshire CEO weigh acquisitions.

Berkshire’s cash hoard was $47.8 billion as of Sept. 30. Buffett is hunting for larger acquisitions after spending about $9 billion last year to acquire engine-additives maker Lubrizol Corp. and more than $10 billion buying stock in International Business Machines Corp.

Berkshire’s equity portfolio is led by a stake in Coca-Cola Co. valued at more than $15 billion and a Wells Fargo & Co. holding worth about $14 billion. DaVita is Berkshire’s 11th-largest holding, according to data compiled by Bloomberg yesterday.

Berkshire’s holding in DaVita surpassed 10 percent in September Buffett’s firm certified in a filing that it didn’t plan to influence management or stage a takeover. Passing that threshold forced the company to disclose subsequent purchases. That transparency may keep Berkshire from making a bid for the entire company, said Funtleyder.

“They’re not going to play some weird game where they’re going to keep filing and run up the price,” he said. “I would assume the more work they do on the company and the industry, the more they like it, the more they buy.”

Peter Grauer, the chairman of Bloomberg LP, the parent company of Bloomberg News, has served on DaVita’s board of directors since 1994.

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