If weekend media reports are correct, Warren Buffett’s Berkshire Hathaway is close to buying Precision Castparts Corp, in what could be Buffett’s biggest purchase ever.
The purchase of Precision Castparts, which makes aircraft components and energy-production equipment, could be announced as soon as this week and cost more than $US30 billion, according to a weekend report in the Wall Street Journal.
Precision Castparts’ market value was $US26.7 billion on Friday and the deal, if it happens, will exceed the amounts paid for Burlington and Santa Fe Railroad (around $US26.5billion in 2010), and shares in HK Heinz (two years ago) and Kraft (this year). Heinz and Kraft are both owned in partnership with a Brazilian investment group, 3G Capital.
Analysts expressed surprise at the news of a possible deal so quickly after the Kraft buy in late March. They point out that Berkshire has been of Precision Castparts’ largest shareholders, with a roughly 3% stake worth $US882 million as of March this year.
It began building that stake in 2012, but it is nowhere near the size of the long term stakes in Coca Cola, Amex and the big insurance group that Berkshire has assembled over the years. In fact it is one of Berkshire’s smaller portfolio investments.
But analysts also point out that any deal to buy control of Precision Castparts would extend Buffett’s into the industrial sector, where he has bought such companies as parts maker Marmon, Israeli toolmaker Iscar, and specialty chemicals company Lubrizol.
It already owns a big stake in a number of power utilities which are growing their renewable investments, while Heinz and Kraft have extended his reach into the food industry and fast moving consumer goods.
Precision Castparts makes components such as nuts, bolts and other fasteners for aerospace companies such as Airbus and Boeing, an industry that accounts for roughly 70% of sales. It also makes products such as pipes and fittings for power and industrial companies.
The company reported a profit of $US1.53 billion on net sales of $US10 billion for its fiscal year ended March 29, but it has been struggling, especially with the downturn in the oil and gas sector which has hit hard.
Precision Castparts shares have fallen 29% since June of last year and 2014, and have lagged the S&P 500 by around 30 percentage points over the last five years.
News of the impending deal came a day after Berkshire Hathaway revealed a 10% decline in second-quarter operating profit, driven by a sharp drop in its insurance business where storms in Australia were a major factor.
Berkshire’s insurance underwriting business, which includes Geico Corp., swung to a $US38 million loss. In the same period a year earlier the business had posted a $US411 million after-tax profit.
Net income in the quarter dropped 37% to $US4 billion. In the June quarter of 2014, it recorded $US2.4 billion in investment gains, but that slumped to just $US362 million this year.
The company also reported a $US411m underwriting loss at its reinsurance arm, in part due to storms in Australia and foreign exchange fluctuations.
