Berkshire Cuts Wesco Offer - Analyst Blog
June 24 2011 - 8:00AM
Zacks
Yesterday, Warren Buffett, the chairman and chief executive
officer of conglomerate Berkshire Hathaway Inc.
(BRK.A) (BRK.B) renegotiated the offering price to Wesco
Financial Corp. (WSC) at $385.00 per share in cash. This
is the third time that the price has been adjusted.
In February 2011, Buffet had formally entered into a binding
agreement to acquire19.9% of Wesco. In September last year, Buffet
had announced the intention to acquire Wesco, of which
Berkshirealready owns 80.1%.
At the time of entering into the formal agreement in February,
Buffet pegged the exchange rate at $386.55, based on Wesco’s
estimated book value per share at the end of January 31, 2011.
Thereafter in March it increased the offer price to $392.91, but
scaled back the price to $389.01 in April again. These changes came
on the back of fluctuation in the value of Wesco’s stock
holdings.
However, the newly set offer price of $385.00 per share
incorporates Wesco’s net worth per share of $386.55 as on January
31, 2011 along with $4.74 per share of earnings for the period
between February 1st and June 24th and deducting $6.29
per share for decline in value of Wesco’s investments ($5.49),
dividends already paid to Wesco’s shareholders’ ($0.42) and
approximate expenses and fees relating to the merger ($0.38).
On the basis of newly quoted offer price of $385.00 the deal
valuation comes at $539 million, which will see 1.4 million shares
exchanging hands.
Wesco shareholders will vote on the deal today. Based in
California, Pasadena, Wesco has been 80.1% owned by Blue Chip
Stamps (“Blue Chip”), a wholly-owned subsidiary of Berkshire since
1983. Thus, Wesco and its subsidiaries are controlled by Blue Chip
and Berkshire. All of these companies may also be deemed to be
under the control of Buffett, who owns 24.3% of Wesco’s stock.
Wesco is run and controlled by Charles T. Munger, who is also
the vice chairman of Berkshire Hathaway. Munger consults with
Buffet on Wesco’s investment decisions, major capital allocations
and the selection of chief executives to head each of its operating
businesses.
Though varying in sizes, both the companies – Berkshire and
Wesco – are similar in terms of business operations. Like the
former, Wesco is also a conglomerate, which houses businesses like
insurance, furniture rental and industrial products. Its insurance
segment consists of the operations of Wesco-Financial Insurance Co.
and Kansas Bankers Surety Co. The furniture rental segment consists
of the operations of CORT Business Services Corp. The company’s
industrial segment comprises Precision Steel’s service center and
industrial supply operations. Wesco also holds shares in some of
the same companies as Berkshire, like Coca-Cola, Kraft, Procter
& Gamble, and Wells Fargo.
Wesco continues to have a strong consolidated balance sheet,
with high liquidity and relatively little debt. Furthermore, its
equity investments are in strong, well-known companies.
Buffett intends to convert Wesco into a wholly-owned subsidiary
of Berkshire, by deploying enormous cash of approximately $28
billion at Berkshire and also to simplify operations at Wesco.
Besides Munger is already 86 and would not carry on with the role
of its chairman for long. Moreover, with 80.1% of interest and a
lot of involvement with Wesco it Berkshire just makes good business
sense to own it completely.
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