Berkshire Hathaway agrees $32bn Precision deal

October 2015 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Warren Buffet’s Berkshire Hathaway announced on 10 August that it had agreed to acquire Precision Castparts Corp in a deal worth around $37.2bn, including the assumption of Precision’s outstanding net debt.

According to a statement, the boards of both Berkshire and Precision unanimously approved the deal. Closure of the transaction is expected to occur during the first quarter of 2016, subject to customary closing conditions, including antitrust approval in a number of foreign jurisdictions. Under the terms of the deal, Berkshire will pay around $235 in cash for each outstanding Precision share held, a premium of 21 percent over the company’s closing price on Friday 7 August, the last trading day before the deal was announced. Berkshire had previously noted that the company held a 3 percent stake in Precision, a stake valued at more than $880m.

The deal for Precision is a landmark transaction for Berkshire. Not only will it be the largest deal ever completed by the company, it will also help to solidify Berkshire’s standing as a diverse and broad conglomerate with holdings in a variety of sectors including consumer goods, industrial and utilities.

Given Berkshire’s desire to diversify its holdings, a deal for Precision is a logical move for the firm. Precision manufactures parts for aircraft makers, power companies and other industrial companies. Among its notable customers are General Electric, Boeing and Airbus. The company earned $10bn in revenues and net income of $1.5bn during the 2015 fiscal year. “I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s board of directors is proud that PCC will be joining Berkshire,” said Mr Buffett, Berkshire’s chairman and chief executive. Following completion of the Precision deal, Berkshire will likely pursue deals for a number of smaller companies, according to Mr Buffett.

Once the sale has been completed, Precision will continue to operate under its name, and remain headquartered in Portland, Oregon. “We are very pleased to be joining forces with Berkshire Hathaway,” said Mark Donegan, PCC’s chairman and chief executive. “We see a unique alignment between Warren’s management and investment philosophy and how we manage PCC for the long-term. We believe that as part of Berkshire Hathaway, PCC will be exceptionally well-positioned to support our customers’ needs into the future. This transaction offers compelling and immediate value for our shareholders, and allows PCC’s employees to continue to operate in the same manner that has generated many years of exceptional service and performance to our customers.”

Though both Precision and Berkshire have expressed their pleasure at the prospect of the deal, not everyone is as excited. Ratings agency Standard & Poor’s said on 11 August that it was watching Berkshire closely and placing the company on CreditWatch Negative following the announcement of the deal. According to S&P, the acquisition of Precision “reflects uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level. In addition, we believe that to fund the acquisition, BRK is likely to use some of the capital resources available at its insurance companies”.

S&P added that it “will monitor developments related to this transaction and expect to update or resolve the CreditWatch listing within the next 90 days, following discussions with (Berkshire’s) management on prospective holding-company cash and leverage metrics, capital adequacy at the insurance companies, and consolidated earnings and cash-flow metrics”.

Richard Summerfield