Buffet is Playing Catch Up

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fiscal 2012 was fairly uneventful for Berkshire Hathaway (NYSE: BRK-B) in terms of acquisitions; Warren Buffett and his loaded rifle found no elephants large or impressive enough to bag. However, this year may be shaping up differently, with a decent-sized acquisition already announced just two months into 2013. With interest rates lower than the average rate of inflation, Berkshire’s cash is losing buying power with every passing day. For that reason, the company must continue to find good investment opportunities in which it can use large amounts of cash. Let’s look at its most recent deal and two possible acquisition candidates.

Ketchup time

On Valentine’s Day, Berkshire and 3G Capital wrote a love letter to H.J. Heinz (NYSE: HNZ) shareholders, announcing that the two would purchase the company for $72.50 per share. Although Berkshire only receives 50% of the equity in this deal, it will also receive $8 billion of preferred shares yielding 9%, a yield you would be hard-pressed to find elsewhere.

Heinz appears to be a good fit for the Berkshire family. Its brands are well-known and its products are sold world-wide. The company’s return on equity of 35%, a metric Buffett has mentioned as a key determinant of a good business, is the fifth highest in its industry. The business is not exciting, but "boring" is an area in which  Buffett has enjoyed great success.

Berkshire has a massive cash pile, which is growing at more than $1 billion every month. At this rate, Buffett can make a similar acquisition every year without seeing his current cash level diminish. 

Elephants in hiding

Berkshire’s stake in satellite television provider DirecTV (NASDAQ: DTV) has grown steadily since 2011. According to its most recently filed 13F, Berkshire increased its stake in the company by 15% in the 4th quarter of 2012, raising its ownership to 34 million shares.

DirecTV’s market capitalization sits just over $29 billion and Berkshire owns approximately 5.6% of the company as a whole. Backing out its ownership stake, it would cost Berkshire around $33 billion to acquire the rest of DirecTV, assuming a 20% takeout premium. Using the operating income numbers provided in the chart below, Berkshire would acquire the company at approximately seven times operating income. At last year’s shareholders meeting, Mr. Buffett mentioned that he would be interested in a large deal of around $30 billion and DirecTV may just fit the bill. 

<img src="http://media.ycharts.com/charts/a502449eecebac7fe6014b8a14b45924.png" />

DTV Operating Income Quarterly data by YCharts

DaVita HealthCare Partners (NYSE: DVA) first appeared in the Berkshire portfolio in Q4 2011, with a purchase of 2.6 million shares. That number has grown significantly since then, with current ownership equaling 13.6 million shares, or 12.9% of the company.

DaVita’s moat comes from its life saving dialysis treatments for patients suffering from kidney failure or end stage renal disease. In Q4 2012 alone, the company’s kidney dialysis centers provided more than 5.7 million dialysis treatments, or approximately 72,000 treatments per day.

Adding a 20% premium and backing out Berkshire’s current stake, this acquisition would take approximately $13 billion from Berkshire’s cash pile. Using the operating income from the chart below, that would equate to around 12 times operating income. With Berkshire’s current war chest, it could acquire both DirecTV and DaVita, and still have some cash to spare.

<img src="http://media.ycharts.com/charts/a72afc2b2cd62c6e4fe17e419e3f6957.png" />

DVA Operating Income Quarterly data by YCharts

Berkshire Hathaway will continue to produce gobs of cash for years to come. If Buffett has his way, that cash will be used to purchase great companies at reasonable prices. This process has greatly rewarded shareholders in the past and will continue to reward them well into the future. DirecTV and DaVita appear to be great companies and may one day join the family of wholly-owned subsidiaries of Berkshire Hathaway. Either way, Buffett will continue to stalk his prey with a fully-loaded elephant gun, biding his time to take down a real trophy.

RoyalScribe owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and H.J. Heinz Company. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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