Darden Restaurants: A Good Fit For Berkshire

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

On February 14, 2013, as I suggested was possible a month earlier, Berkshire Hathaway (NYSE: BRK-B) announced a joint deal with Brazilian based 3G ventures to buy H.J. Heinz (NYSE: HNZ) for $23.2 billion. However, despite this large deal, Buffett has said he is still looking for more acquisitions. I believe Darden Restaurants (NYSE: DRI) would be a good fit for Berkshire.

Buffett Buys What He Knows

One trademark of Warren Buffett's investing style is that he only buys businesses that are simple and that he truly understands. In terms of private companies, Berkshire's holdings are focused in a few areas: insurance, retail operations, railroads, construction, and chemicals. Some notable companies owned by Berkshire include GEICO, General Re, Dairy Queen, See's Candies, Acme Brick, and Benjamin Moore. Berkshire's two most recent massive acquisitions were railroad operator Burlington Northern Santa Fe and specialty chemical producer Lubrizol. Darden meets this criteria as the company that is simple to understand. Darden, a restaurant company, operates an easy to understand business.

Brands and Moats

Buffett often says that he likes to buy high quality brands and companies with wide competitive moats. Evidence of what Buffett likes to buy can be seen by looking at his five largest stock holdings: Coca Cola, Wells Fargo, IBM, American Express, and Procter & Gamble. All of these companies have something in common: they have highly visible, trusted, and valuable brands. Likewise, DRI is a company with many strong brands including, Olive Garden, LongHorn Steakhouse, Red Lobster, The Capital Grille, and Seasons 52. Combined, Darden is the largest full service restaurant company in the world, with more than 2,000 restaurants in total and more than 400 million meals served every year. The reputation of these brands has been built over many years and has created something of a moat for Darden.

Price & Valuation

Currently, Darden trades at 13.2 times trailing earnings and 12.6 times forward earnings. Based on these numbers, it is difficult to argue that Darden is "dirt cheap", but Buffett does not necessarily seek out "cheap" investments. Buffett has famously said:

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

In terms of the value of the deal, currently Darden's current equity value is $5.98 billion and the company has debt of $2.93 billion. So, given a reasonable premium, the total cost of the deal for Berkshire would be likely be close to $10 billion. Prior to the Heinz deal, Buffett said that he was looking for a deal between $20 billion & $30 billion. Berkshire's investment in Heinz will cost just over $12 billion, so, based on size, Darden would be a nice fit for Berkshire.

Conclusion

Given its simple and easy to understand business, competitive advantage, market leading position, and price Darden is a good fit for Berkshire and a possible target for Buffett. However, my speculation that Darden could be takeover target for Berkshire is not the only reason to consider buying the stock. In addition to its high quality brands and reasonable valuation, Darden also offers a 4.33% dividend yield.



sammypollack has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Darden Restaurants. 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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