Berkshire Hathaway to buy Phillips 66 unit for $1.4bn

February 2014 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Private equity firm Berkshire Hathaway Inc announced in late 2013 that it had agreed to acquire a specialty chemicals unit, Phillips Specialty Products, from Phillips 66 for around $1.4bn of Phillips 66 stock. The expected price tag amounts to roughly 3 percent of the market capitalisation of the company at the time of writing.

In September 2013 Berkshire Hathaway reported that the firm owned approximately 27.1 million shares of Phillips 66, a stake worth just over $2bn. Under the terms of the deal for the unit, Phillips 66 will receive around 19 million of those shares from Berkshire as payment. According to the two companies the exact number of shares to be transferred will be determined by the share price at the time of the deal’s closing, which is expected in the first half of 2014, pending regulatory reviews.

As a result of the share transfer Berkshire’s stake in Phillips 66 will be significantly reduced. The private equity firm’s shareholding in Phillips 66 will drop from 4.5 percent currently to approximately 1.3 percent. “Berkshire Hathaway made a strong offer for our high-performing flow improver business,” said Greg Garland, chairman and chief executive of Phillips 66. “This transaction optimises our portfolio and focuses growth on our Midstream and Chemicals businesses.”

The acquisition of the Phillips 66 unit, which produces chemicals to improve the flow potential of pipelines, is the latest move by Berkshire as it looks to diversify its portfolio of companies. Indeed, the firm owns a number of other businesses and interests including power plants, insurance operations, apparel makers and consumer brands. In November 2013 Berkshire reported a profit rise of 29 percent in the third quarter of the year as it benefited significantly from strengthening demand in the housing, railroad and consumer markets. “I have long been impressed by the strength of the Phillips 66 business portfolio,” noted Warren Buffett, Berkshire Hathaway’s chief executive, in a statement announcing the acquisition. “The flow improver business is a high-quality business with consistently strong financial performance, and it will fit well within Berkshire Hathaway.” Mr Buffet also stated that James Hambrick, chief executive of Berkshire’s specialty chemicals unit The Lubrizol Corporation, will oversee the unit’s strategic direction. Berkshire acquired Lubrizol for around $9bn in 2011.

2013 was a particularly active year for Berkshire, especially in the oil sector. In November 2013 the firm acquired a $3.7bn stake in the Exxon Mobil Corporation. Berkshire also reduced its stake in oil and gas company ConocoPhillips by 20 million shares to around 3.5 million.

The company also chose to invest in the Alberta oil sands in Canada in 2013, investing $500m in Calgary’s Suncor Energy Inc. Furthermore, the firm accumulated a 17.8 million share stake in Suncor, Canada’s largest oil producer. In late 2013 Berkshire’s MidAmerican Energy unit also paid $5.6bn for the Nevada utility company NV Energy Inc. The firm also moved to publicly endorse the Keystone XL pipeline, which would carry oil from Alberta to refineries in the southern US.

Away from the oil sector, in June 2013 Berkshire purchased half of ketchup maker H.J. Heinz Co for $12.3bn, and in May the firm paid around $2.05bn for the 20 percent it did not already own of Israeli toolmaker IMC International Metalworking Cos, known as Iscar.

Houston based Phillips 66 was itself spun out of ConocoPhillips in 2012. Since the spin-out process was completed, the company has attempted to consolidate its geographic footprint and concentrate on making transportation fuels and chemicals in the US. Phillips 66 has also increased its investments at Chevron Phillips Chemical Company, a petrochemical business it co-owns with oil major Chevron Corporation.

Richard Summerfield