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Horacio Marquez Says Buffett’s Berkshire Is a Bargain

Horacio Marquez — Mon, 25 Aug 2008 14:51:22 +0000

Since March, shares in Warren Buffett’s investment vehicle, Berkshire Hathaway (NYSE:BRK.A, BRK.B), have plunged 23%.

The Class A shares closed Friday at $116,650 each, down from their 52-week high of $151,650 (the Class B shares represent 1/30th of the Class A shares).

However, Money Morning’s Horacio Marquez says Berkshire’s share price is merely a reflection of the slowdown in the US economy. And with shares now at bargain prices, it’s a perfect opportunity to take a stake in one of the best investment portfolios on the planet…

Warren Buffett, the ‘Oracle of Omaha’, Tells German Audiences That the U.S. Economy is in a Deep Recession

William Patalon III — Tue, 27 May 2008 13:00:16 +0000

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investment guru Warren Buffett said in an interview published Saturday in the German magazine Der Spiegel.

The United States is “already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects,” Buffett said. “It will be deeper and last longer than many think.”

As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

Buffett is the world’s richest man, with a net worth of $62 billion. As the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), investors have for years followed Buffett’s moves to see which investments are going to take off next. Financial-research studies actually show that mimicking Buffet’s investment moves can be a most-profitable strategy.

A New Focus

Within the last year, Buffett has shifted his focus abroad – the precise strategy that Money Morning has been advocating since this global-investing news service was formed back in 2007.

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany. However, Buffett remains most interested in German companies that are family-owned and well-managed. And he’s always in the hunt for carefully selected companies with great brand names and strong market positions.

“If the world were falling apart I’d still invest in companies,” he said.

Berkshire’s recent play for U.S. chewing gum icon Wm. Wrigley Jr. Co. (WWY) underscores that willingess to invest in the “right” opportunity, regardless of the general economic outlook. Just last month – against a backdrop of recessionary and inflationary fears, a weak dollar, soaring energy prices, and a spiraling credit crunch – Berkshire joined forces with closely held Mars Inc. and agreed to provide $4.4 billion in financing for the $23 billion deal. In addition to providing the debt financing, Berkshire will make a minority investment in Wrigley, valued at about $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

Once the deal closes, Wrigley will become a separate Mars subsidiary. And there may be a lot more to the deal in the long run, sources say. By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

“We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

Buffett also renewed his criticism of the derivatives trading that helped create the current global credit mess.

Buffett Criticizes Waste

“It’s not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health,” Buffett told the German magazine.

Buffett complained about the lack of effective controls.

“That’s the problem,” he said. “You can’t steer it, you can’t regulate it anymore. You can’t get the genie back in the bottle.”

When it comes to choosing investment targets, Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses such as Mars and Wrigley, which each have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, recently told the Dow Jones Newswires.

The Wrigley deal is just the latest in a string of recent deals for the so-called “Oracle of Omaha.” Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

Source: Warren Buffett, the “Oracle of Omaha,” Tells German Audiences That the U.S. Economy is in a Deep Recession

Mars Teams up With Berkshire Hathaway and Warren Buffett in $23 Billion Buyout of Wrigley

Jennifer Yousfi — Tue, 29 Apr 2008 17:51:06 +0000

Take two leading candy companies, mix in $23 billion, and add in a pinch of investing guru Warren Buffett and what do you get? How about one of the largest candy companies on the planet…

Closely held Mars Inc. – with a sweet $4.4 billion in debt financing from Buffett and Berkshire Hathaway Inc. (BRK.A, BRK.B) – will acquire U.S. chewing gum icon Wm. Wrigley Jr. Company (WWY), in a deal valued at $23 billion.

“There’s really nothing that can go wrong with something like the Wrigley and Mars brands,” Buffett, 77, said during an interview on the CNBC cable TV network yesterday (Monday). “People are eating more and more of their products every day.”

Mars will pay $80 per share for Wrigley in an all-cash deal, which represents a 28% premium over Wrigley’s Friday closing price of $62.45. With the bid from Mars, Wrigley shares shot up 23%, gaining $14.46 each yesterday to close at $76.91.

Once the deal closes, Wrigley will become a separate Mars subsidiary.

“It’s a great price,” Thomas Burnett, director of research at New York-based Wall Street Access, told Bloomberg News. “Nobody is going to pay more than that. Who is going to go up against Mars and Buffett?”

And there’s possibly a lot more to the deal, sources revealed late last night: By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

Whither Hershey?

The Mars-Wrigley merger brings together two all-star confectioners. The Chicago-based Wrigley’s by itself has enough marquee brands to fully stock any candy counter, including the Juicy Fruit, Orbit and Eclipse gums, Life Savers hard candies and Altoids mints. The McLean, Va.-based Mars is vending-machine royalty in its own right, wielding such perennial winners as M&Ms, Twix and Snickers.

Despite their size, both are agile players. Wrigley, for example, is a globally focused innovator, even re-shaping its product portfolio to appeal to regional tastes and cultural customs as it moves into new markets all around the world. Last summer in China, for instance, Wrigley talked about how it combined its traditional products with concepts adapted from traditional Chinese medicine to create such new alternative “flavors” as “beauty” gum, “cooling” gum and “relaxation” gum. Wrigley ended up with a big hit: Despite a sluggish market here at home, such bold moves overseas allowed the company to deliver a 21% jump in profits for that quarter.

The deal could put pressure on Mars rival, The Hershey Co. (HSY), to resume talks about a possible merger with London-based Cadbury Schweppes PLC (CSG). The two candy-making firms have been in sporadic discussions for quite some time over a possible merger, but as yet have been unable to agree on terms.

Candy companies are facing higher raw ingredient costs as the prices of commodities continue to soar. Wrigley’s costs have remained more constant, as the majority of its products do not include dairy, cocoa, or wheat.

In addition to providing the debt financing, Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) will make a minority investment in Wrigley valued at $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

A Look Inside Berkshire

Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses like Mars and Wrigley, which have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, told the Dow Jones Newswires.

This move by Berkshire and Buffett is just the latest in a string of recent deals for the “Oracle of Omaha.” Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

Buffett already owns a high-quality confectioner – See’s Candies, a specialty West Coast chocolate-and-candy maker that was founded in 1921 and acquired by Buffett in 1972. Sales were $30 million and pretax profit was less than $5 million that year. In 2007, the San Francisco-based See’s earned $82 million on revenue of $383 million.

In his most recent letter to Berkshire shareholders, Buffett attributed such “extraordinary results” down to See’s “durable competitive advantage.”

Indeed, See’s is representative of the kind of companies that Buffett likes to own – operations such as the Nebraska Furniture Mart, or Borsheim’s Fine Jewelry, which are highly profitable and display strong growth, yet somehow manage to maintain the “feel” of the old-time sole-proprietorship shops that used to occupy the downtown “Main Street” business district in every small town. See’s Candies is a really solid example of that kind of acquisition: Despite its growth, it still sells its confections from several shops it operates, but also does a huge mail-order business from its catalog, which – unlike most U.S. companies – it continues to offer for free.

Once the Mars buyout of Wrigley is concluded, Buffett will own a piece of the chewing-gum maker.

Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) will provide financing for the deal. The financing package consists of about $11 billion from Mars, a $5.7 billion senior debt commitment from Goldman, $4.4 billion in subordinated debt from Berkshire, and the $2.1 billion investment from Berkshire – payable at the time the deal closes, Dow Jones and others report.

When it comes to Berkshire, the one question that arises on an ever-more-frequent basis is that of succession – who will succeed the wildly successful Buffett? Berkshire claims to have such a plan in place.