Buffett Aerospace Play Signals Further Deal Ambitions: Real M&A

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Warren Buffett’s $37 billion foray into aerospace components, power-plant parts and gas pipes may give him new avenues for acquisitions.

The billionaire’s holding company, Berkshire Hathaway Inc., has made industrial purchases before, including the 2006 buyout of Iscar Metalworking Cos. and the takeover of railroad giant Burlington Northern Santa Fe in 2010. With Buffett’s latest deal, the agreement announced Monday to buy Precision Castparts Corp., he’s widening his purview.

“He’s stepping out away from what they’re normally involved in,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates. “I doubt this would be a one-off situation. I would think they would now use Precision Castparts as a platform to go out and build some scale in this area.”

Airplane-part manufacturers from B/E Aerospace Inc. to KLX Inc. and Rockwell Collins Inc. rose on news of the deal, in part on speculation they too could become targets. A company such as parts maker Astronics Corp., which makes aircraft lighting, could also complement Precision Castparts, said Todd, whose firm owns Astronics shares.

Prior to the Precision Castparts announcement, speculation about Buffett targets had focused on food-related companies after his big bets on H.J. Heinz Co. and Kraft Foods Group Inc. with 3G Capital.

“This creates a couple of different new M&A venues for Berkshire to play off of,” said Joel Levington, an analyst at Bloomberg Intelligence.

No ‘Elephants’

Any acquisition Buffett makes in the near term will probably be smaller. He told CNBC that the Precision Castparts takeover takes him “out of the market for an elephant,” his code word for a mega-deal.

Companies such as $2 billion KLX or $1.2 billion Astronics would be pocket change for Berkshire, which will still have about $40 billion in cash after the Precision Castparts takeover closes. And Buffett has a history of using acquisitions as starting points for more deals.

In 2000, for example, Berkshire bought MidAmerican Energy Holdings. The utility business -- now called Berkshire Hathaway Energy -- became a platform for buying power companies in states including Nevada and Oregon, as well as an electric transmission business in Canada. It’s also a regular investor in wind and solar projects.

Buffett’s deal for chemical maker Lubrizol in 2011 also turned out to provide opportunities for more deals. Last year, the unit purchased two businesses from Weatherford International Plc that make products for the oil-and-gas industry.

No Constraints

Precision Castparts is “one of the companies that he buys with the idea of not only enhancing the current return on the cash that he used to buy it, but also as a good source of bolt-on acquisitions,” said Bill Smead, CEO of Smead Capital Management, which holds Berkshire shares among the $1.9 billion in assets it manages. “That company will not be constrained anymore by what its stock does.”

Since taking over as chief executive officer of Precision Castparts in 2002, Mark Donegan has spent at least $9 billion on almost 40 takeovers.

Larger Purse

While most of his deals have tended to be for less than $1 billion, the size of Precision Castparts’ targets could grow now that it has “a potentially larger purse to work with,” said Jeff Windau, a St. Louis-based analyst at Edward Jones & Co.

“It does give them more flexibility,” Windau said. Precision Castparts “could have been getting a little constrained, just based on the fact that their business has been under pressure.”

The source of the pressure was the energy-equipment business, which has been struggling amid the slump in commodity prices. Precision Castparts earns about 70 percent of its revenue from the aerospace industry and 17 percent from power-generation customers, according to data compiled by Bloomberg.

Buffett could also look to build out the energy division with acquisitions. The deep discounts in that industry could entice the value investor. On the other hand, he could just get rid of the oil-and-gas parts of Precision Castparts, said Todd of Greenwood.

“Honestly it wouldn’t surprise me if six months from now, they sold that part of the business off,” Todd said. “Clearly they’re taking advantage of the depressed valuation due to that business but I think the main focus is probably the aerospace.”