Investors who couldn't afford to buy Berkshire shares bought cheaper Wesco stock as proxy; now, the Oracle taking Wesco private
Warren Buffett's plan to remove Wesco Financial Corp. from the stock exchange will close what was considered a “backdoor” to investing alongside the billionaire.
Buffett's Berkshire Hathaway Inc. has agreed to acquire the 20 percent of Wesco it doesn't already own for about $545 million in cash and stock. Wesco shareholders will vote on the deal today at a meeting in Pasadena, California.
Buffett took control of Wesco in 1983 and assigned oversight of the firm to Berkshire Vice Chairman Charles Munger, who is now 87. Wesco retreated from its traditional business of lending and focused on insurance, furniture rental and steel storage. The firm also profited from deals Buffett struck for Berkshire. Investors that couldn't afford the $11,750 price of a Berkshire share in 1992, could buy Wesco stock for $83 each.
“The only reason it's been public for all these years is Charlie and Warren are so cheap that they didn't want to pay a big premium to buy Wesco,” said Hampton Adams, portfolio manager and head of research for Pasadena-based Gamble Jones Investment Counsel, which holds shares in Wesco and Berkshire. “With Charlie getting up to the age he is now, I think it makes sense just to go ahead and consolidate it all.”
Buffett, Berkshire's 80-year-old chairman and chief executive officer, is simplifying the company's holdings as he prepares the firm for its next generation of leaders. Adams said in an interview that Berkshire previously refrained from buying all of the unit because shareholders seeking a “backdoor way” to invest with Buffett had boosted Wesco's stock price. “As a value investor myself, I appreciate being cheap,” Adams said.
Stocks Surge
Wesco has surged more than 20-fold since the end of 1983. Omaha, Nebraska-based Berkshire's Class A shares have risen more than 30-fold since it was listed on the New York Stock Exchange in 1987. Berkshire bid for Wesco at about book value, a measure of assets minus liabilities. It will pay $385 a share in cash and stock, the companies said yesterday.
Wesco profited under Berkshire's control by shouldering risks on catastrophe reinsurance deals arranged by Buffett and his large-risk specialist, Ajit Jain. The company also has held assets picked by Buffett, including a portion of the Goldman Sachs Group Inc. preferred stock that Berkshire bought in 2008. Munger's investment in Freddie Mac before the firm's 1989 public offering contributed to a $852 million gain in 2000.
Munger helped Buffett evaluate stocks and decide on the acquisitions that built Berkshire into a $187 billion seller of energy, consumer goods and insurance. Shareholders' equity at Berkshire jumped ninefold to $157.3 billion in the 15 years ended in December on the purchase of firms like railroad Burlington Northern Santa Fe and stock picks including PetroChina Co. Wesco equity over the same period almost tripled to $2.77 billion.
Class B Shares
Wesco's status as a less-costly alternative to Berkshire stock was diminished over the last 15 years. In 1996, when Berkshire traded between $29,800 and $38,000, Buffett created a Class B stock by issuing equity at one-thirtieth the price. Last year, he split the Class B shares 50 for 1.
Berkshire Class A shares slipped $707 to $113,415 yesterday. Class B shares fell 36 cents to $75.61. Wesco gained $1.91 to $384.91.
Buffett and Munger, who reported holdings between them of more than $35 billion in Berkshire stock and none in Wesco, have said that the outlook for growth was better at the parent than at the unit. Munger, Wesco's chairman and CEO, told investors in his annual letters that the subsidiary “is not an equally-good- but-smaller version of Berkshire.”
“See, I think it is, because a lot of the businesses Berkshire is in, I have no interest in,” said William Reik, a Wesco shareholder and part owner of the Major League Baseball's Cincinnati Reds. “You get more leverage to the super- catastrophe reinsurance business with Wesco.”
No Higher Offer
Buffett rejected a request by Wesco Director Carolyn Carlburg for a higher offer for the unit's outstanding shares. Berkshire stock has a better outlook than Wesco shares, and investors in the parent company may have their interests hurt by the transaction, even at the original terms, Buffett said.
“We regard the transaction as disadvantageous to Berkshire if a substantial number of Wesco shareholders elect to take Berkshire stock,” Buffett said in a Jan. 21 letter that was published in a regulatory filing. “That's because I believe the prospects for Berkshire shares over the next 10 years to be considerably better than the prospects for Wesco shares.”
--Bloomberg News--
