Berkshire CEOs Spend Quietly, Match Buffett on Heinz DealNoah Buhayar
Warren Buffett stole headlines when he committed $12.1 billion in a deal to take ketchup maker HJ Heinz Co. private this year. Managers at his Berkshire Hathaway Inc. spent as much in 2012 while attracting less attention.
Executives who gathered last week for Berkshire’s annual meeting in Omaha, Nebraska, said in interviews that they plan to spend even more this year as they upgrade a rail network and energy utilities, expand manufacturing capacity and hunt for additional acquisitions.
Buffett, 82, relies on chief executive officers of the operating units to make deals and invest in plant and equipment to build the businesses and widen their competitive advantage. That helps slow the accumulation of cash and reduces the need for Buffett, Berkshire’s chairman and CEO, to find other uses for the money.
“If I don’t take my own cash flow and reinvest, all I do is add to his problems,” said James Hambrick, CEO of chemical maker Lubrizol, which Berkshire bought in 2011.
Hambrick’s unit plans to spend about $1.4 billion over the next three years as it replaces equipment and adds capacity to manufacture products like chlorinated polyvinyl chloride, a plastic that’s used for pipes in buildings. Even after similar spending and acquisitions in recent years, Lubrizol has still sent money to Omaha for Buffett to allocate, Hambrick said.
Capital spending at Berkshire climbed 19 percent to $9.78 billion in 2012 from a year earlier, driven by railroad Burlington Northern Santa Fe and utility owner MidAmerican Energy Holdings. Both use their cash flows and issue debt for regular investments in property, plant and equipment. Berkshire subsidiaries spent about $2.3 billion on 26 acquisitions in 2012, according to the company’s annual report.
Buffett agreed in February to spend $8 billion for a preferred stake and $4.12 billion for half the common equity in a new holding company that will own Heinz. The rest will be controlled by Jorge Paulo Lemann’s 3G Capital.
Berkshire shareholders should “delight” in the spending because Buffett and his deputies have a track record of using funds wisely, said James Armstrong, president of Henry H. Armstrong Associates, a Pittsburgh-based investment manager that oversees about $400 million, including Berkshire shares.
“You’re not going to see a lot of wasted money,” he said in a phone interview.
Buffett praised the spending by his deputies this year in his letter to shareholders. Berkshire will keep its “foot to the floor and will almost certainly set still another record for capital expenditures in 2013,” he wrote. “Opportunities abound in America.”
The dealmaking and expansion plans of Berkshire’s managers have helped reduce pressure on Buffett to allocate its cash pile, which climbed to a record $49.1 billion at the end of March. Buffett used funds from insurance units to buy whole businesses and build the largest equity stakes in Coca-Cola Co., American Express Co. and other publicly traded firms.
While Buffett is still seeking to buy companies and invest in stocks, Berkshire’s model has shifted to more capital-intensive businesses in the last 15 years as he added the railroad, MidAmerican, Lubrizol, industrial manufacturer Marmon and Israeli toolmaker Iscar.
Insurance operations including Geico have also been expanding. Buffett said last week that his company is planning to get into commercial insurance “big time” after hiring four executives from American International Group Inc.
BNSF plans to increase capital spending to a record $4.1 billion this year as the railroad prepares for rising oil shipments and expands terminals that can handle containers that move by rail, road and sea. That includes $2.3 billion on the rail network and about $1 billion on locomotive, freight car and equipment purchases.
“These are 20, 30, 40, 50-year assets,” BNSF CEO Matt Rose said in an interview at the meeting with Bloomberg Television’s Betty Liu, who asked about spending. “It’s just a long-term belief that the U.S. economy will continue to grow. Population will drive that. And we want to make sure that we have the physical plant to take advantage of it.”
MidAmerican said last month that it allocated $11.8 billion for spending in the next three years on development and maintenance capital expenditures. CEO Greg Abel formed a renewable-energy unit last year to invest in wind and solar projects and struck a deal with TransAlta Corp. to build natural-gas power plants. The companies are bidding to develop transmission lines to supply electricity to Canadian oil-sands projects.
Berkshire Class A shares climbed 1 percent to $167,780 at 4:15 p.m. in New York, a record close. The stock rallied 25 percent this year after advancing 17 percent in 2012.
Buffett has told managers that they can communicate with him as much or as little as they want about most matters, and should contact him if they’re contemplating “unusually large capital expenditures or acquisitions.” The billionaire has quipped that he and Berkshire Vice Chairman Charles Munger “delegate almost to the point of abdication.”
Buffett is a sounding board for CEOs of the operating business, helping to hone and improve their ideas, said Eitan Wertheimer, whose family sold 80 percent of Iscar to Berkshire in 2006 for $4 billion. Buffett’s firm said this month that it reached a deal to buy the remainder for $2.05 billion.
“Warren’s not a manager,” Wertheimer said. “He’s a teacher for all of us.”
Victor Mancinelli, who has expanded Berkshire’s farm-products company, CTB Inc., through acquisitions, said that he typically approaches Buffett when an idea for a deal “picks up steam.” The billionaire is usually able to grasp right away whether a transaction makes sense, helping CTB act fast.
“He’s so quick and he understands business so well that what could take hours or days for someone else” takes him minutes, Mancinelli said. “When things come together just correctly, we pounce.”