Berkshire Hathaway Inc.
A Class Shares Market Cap (as of 14/03/14) $305.93bn
B Class Shares Market Cap (as of 14/03/14) $269.60bn
Graham Holdings Co. Market Cap (as of 14/03/14) $5.28bn
Berkshire Hathaway has agreed to acquire Miami TV Station WPLG and $400m of its own shares from Graham Holdings Co. in exchange for 1.6m Graham Holdings shares.
According to the regulatory filing, the deal values the station at about $364m, whilst the amount of shares and cash Berkshire will receive will be based on market prices upon deal completion. Overall, Buffet’s stake in Graham Holdings is valued at $1.1bn.
Through this deal Berkshire is scaling back on one of its most successful investments. The Oracle of Omaha’s business ties with Katharine Graham’s holding, formerly known as “The Washington Post Company”, started in 1973 when Mr. Buffett was invited to sit in its Board of Directors after an initial investment of $11m. Last month, however, Buffett announced his intentions to reduce his investment in Graham which stood at 1.73m shares (equivalent to c. 28% of the company). As part of the deal filed on Wednesday Berkshire Hathaway will be retaining between 91,490 and 111,716 shares in Graham Holdings depending on market prices upon deal completion.
Buffett has very artfully crafted a maneuver that will avoid both Berkshire and Graham Holdings the large tax liability they would have incurred on capital gains on, respectively, Graham and Berkshire’s Class A stock if they had done a direct swap. Considering a standard US tax rate (38%) on Warren Buffet’s exit from Graham ($1.1bn), Berkshire Hathaway would have been exposed to $418m in federal and local taxes on appreciated assets. Instead the two companies created a subsidiary called “NewSub”. The newborn company, controlled entirely by Berkshire Hathaway, will do all the cash, stock and assets swap, thereby meeting the requirements of a particular exemption on capital gains (Section 355 of the Internal Revenue Code) permitted by the Security Exchange Commission, allowing the two companies to reduce their tax liabilities to $0.
Most of the analysis about the deal, including ours, concludes that the transaction is the result of a coherent restructuring plan, as Graham Holdings Company is not currently incurring in financial troubles. Graham Holding Group’s CEO and chairman, Donald Graham, is pursuing the goal to regain control of the conglomerate, divesting from the most unprofitable businesses (cable TV and newspapers), which accounted only for $400m of revenues, and fostering growth in for-profit education, which produced $2bn of revenues in 2013. In the second half of 2013 the group managed also to sell The Washington Post, its well-known newspaper, to Amazon’s CEO Jeff Bezos in a $250m deal, confirming its interest in divesting away from the media business to focus on Kaplan, its for-profit education unit. Furthermore, buying back a consistent amount of shares will allow Mr. Graham to more easily manage his group, which is now almost fully controlled by the descendants of Eugene Isaac Meyer, the first publisher of The Washington Post.
The Oracle of Omaha’s holding company, Berkshire Hathaway Inc., has seen its net worth per share rise at an average speed of 19% per annum since 1965 (S&P 500 annual growth rate is 9.8%). Its assets, including a cumulative amount of $48.12b in cash and cash equivalents, allowed Buffett to perform several acquisitions with the format of the partnership and to further expand into the media industry, in which the company has invested a lot, acquiring more than 28 local newspapers in the last fifteen months at a total cost of $344m.
Buffett’s Berkshire Hathaway has the resources to exploit economies of scale, given by its strong presence in the media market, following a long-term strategy and boosting WPLG profitability or, according to several views, selling the channel to world-class media conglomerates such as Time Warner Communications. In any case, Buffet is not a neophyte to investing in TV stations, as one of his most successful investments in the 90’s was a bet on Capital Cities/ABC. According to Buffett, in his experience “(TV Stations) require virtually no capital investment […] they were simple to run and showered cash on their owners”.
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