Two Very Different Buyout Candidates for Berkshire Hathaway

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Warren Buffett's involvement in a $23 billion deal for Heinz (NYSE: HNZ) signifies the Oracle of Omaha's desire to put the trove of cash at Berkshire Hathaway (NYSE: BRK-B) back to good use.

After taking out Heinz, analysts suspect Berkshire Hathaway has as much as $15 billion in additional cash it needs to deploy – cash that earns shareholders paltry returns invested in cash equivalents, not companies.

But what will Buffett buy next? Investors who can front-run Buffett into his next acquisition stand to make large returns on the premium paid to take the company private. I'll highlight two different companies that could soon be acquisition targets for Berkshire Hathaway.

Two Different Directions

Buffett's next move has to fit two very basic criteria. These deals would be digestable (less than $30 billion in equity) and blend well with Buffett's preference for predictable, borderline boring revenue sources. 

Following these basic rules, I've identified two companies that would best fit Buffett's target acquisition size and strategy. One would extend Buffett's buying streak while another would put it to an end. One would give him more capital to invest as he pleases, while another would tie up virtually all of Buffett's remaining cash pile.

My two dark horses for the next Berkshire acquisition are:

The Chubb Corp. (NYSE: CB), AKA “The Float Reloader” 

Warren Buffett's penchant for the insurance industry is founded on a huge source of value creation: using the float from an insurance business to make major investments. The Chubb Corp. is well-known as a signature brand in insurance with strict underwriting standards and industry-leading underwriting profits.

Since 2007, the company slashed diluted shares outstanding from 400 million to 275.25 million shares, a sign of shareholder-friendly managers that Buffett loves to have working under him. These share repurchases alone have helped Chubb's share price swell more than 61% in just the past five years despite zero top-line revenue growth.

As an add-on benefit, a Berkshire-led acquisition of Chubb would give Buffett access to a $50 billion investment portfolio to be invested as Buffett sees fit. If the Oracle is ready for more and bigger deals, a Chubb acquisition would give him the capital necessary to do it. A P/E ratio of 14 makes Chubb affordable, even if acquired at a substantial premium to the current market price.

General Mills (NYSE: GIS), AKA “Classic Buffett” 

This basic and boring consumer staples company would fit in perfectly with a portfolio that includes companies like Fruit of the Loom and The Pampered Chef.

Any General Mills deal would likely be structured very similarly to Heinz. The company currently operates with significant financial leverage, having posted return on equity greater than 20% every year since 2006 with return on assets ranging between 6% and 7% during the period. General Mills is the kind of company built for a private equity-style, highly levered buyout with cheap debt financed at record low interest rates. The trailing P/E ratio of 16 indicates a good value, as General Mill's earnings history reveals net income is consistent with free cash flows.

A combination of a high-quality brand and more than $1 billion of new free cash flows to Berkshire should make General Mills the ideal next target in the consumer staples space.

Buffett's next deal will be big. Investors who can beat Buffett to the punch stand to earn big premiums when the Oracle comes in with a take private bid.


valuemagnet has no position in any stocks mentioned. 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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