Buffett to acquire Oregon aerospace firm in $37.2 billion deal

NEW YORK — Warren Buffett’s Berkshire Hathaway agreed to buy Precision Castparts, the maker of equipment for the aerospace and energy industries, in a deal valued at $37.2 billion, including debt.

Buffett’s firm will pay $235 a share in cash the companies said on Monday in a statement. That’s 21 percent more than Friday’s closing price for the Portland, Oregon-based company, which had dropped 17 percent in 12 months amid the slump in energy prices.

The deal is one of the largest by Buffett, who has been building his Omaha, Nebraska-based firm in recent years with the acquisition of industrial companies such as Iscar Metalworking in 2006 and chemical maker Lubrizol in 2011. It will also help work down a cash pile that climbed to more than $66 billion at Berkshire as of June 30.

“This is a business that’s multi-decade in nature,” David Rolfe, who manages about $11 billion including Berkshire shares at Wedgewood Partners, said of Precision Castparts. “They have these incredibly long relationships with some of their customers. And people aren’t going to Fred’s moldings or Fred’s castings to get a little bit cheaper part on the inside of a jet engine.”

The target company uses advanced engineering technology to make metal industrial components for jet engines and power plants as well as pipes for the oil and gas industry. It employs about 30,000 people and produced $2.6 billion of pretax operating income on $10 billion of revenue in its last fiscal year.

Precision Castparts said in July that it expects $10 billion to $10.4 billion of sales and an operating margin of about 27 percent in its current fiscal year, which ends in March. Last year, 70 percent of its sales were made to the aerospace industry, with another 17 percent going to the energy market. The company’s customers include General Electric, Boeing and Airbus.

“I’ve admired PCC’s operation for a long time,” Buffett said in the statement. “It is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.” Berkshire said the deal is expected to be completed in the first quarter of 2016, subject to regulatory approvals.

Berkshire will use about $23 billion of its cash for the deal and borrow approximately $10 billion, Buffett told CNBC. He said he plans to hold off from megadeals for about a year, because the company needs to make sure it still has plenty of cash on hand.

PCC pushes Berkshire further into heavy industry and cuts reliance on insurance and stock picking, growth engines for most of Buffett’s 50 years in charge. Today’s Berkshire, with BNSF railroad and renewable energy holdings, could hardly have been imagined in the mid 1990s when the Buffalo News and shoe businesses were prominent units and the company was considered a mutual fund because of its equity holdings.

“Those days are gone,” Lawrence Cunningham, a professor at George Washington University and author of the book “Berkshire Beyond Buffett,” said in an interview. “It’s really an industrial operation now.”

Buffett has also shifted his equity portfolio, cutting back on some long-time holdings. Take the case of Procter &Gamble, the razor maker that has long been closely associated with the billionaire and was his third-largest position at the end of 2008. Last year, he struck a deal to trade most of the stock back to P&G in exchange for its Duracell battery business.

Buying companies with enduring prospects is “a different sort of build-up of value” than investing in stocks, Buffett, Berkshire’s chairman and chief executive officer, told shareholders at his annual meeting last year. “We’ve moved into phase two.”

In 2010, Buffett spent $26.5 billion in cash and stock for the portion of Burlington Northern Santa Fe that Berkshire didn’t already own, valuing the railroad at about $34 billion. Berkshire also agreed to take on about $10 billion of BNSF debt.

Jeff Matthews, an investor who has written books about Buffett, said it’s unlikely that a purchase of Precision Castparts will work out as well as the railroad.

“It’s night-and-day different from the BNSF acquisition,” which was announced at a time when there was widespread concern about the economy, he said in an email. “Today there are no bargains like that,” Matthews said, adding that he was considering whether to sell his Berkshire stock. “I just don’t feel comfortable spending that kind of dough on that kind of business in this kind of market.”

Berkshire Class B shares slipped 1.4 percent to $141.60 in early trading at 8:06 a.m. in New York. The stock had dropped more than 4 percent this year through Friday’s close.

Buffett also backed the merger that created Kraft Heinz and Berkshire said on Friday in its second-quarter report that results for the three months ending Sept. 30 will probably include a pretax gain of about $7 billion tied to the transaction.

Insurance operations haven’t fared as well lately, posting a net underwriting loss of $38 million in the second quarter, compared with a gain of $411 million a year earlier, driven by deteriorating results at the company’s namesake reinsurance operation.

The billionaire, who will turn 85 on Aug. 30, told shareholders in May that reinsurance, in which the company takes on risks from primary carriers, has “turned for the worse.” That’s because hedge funds and other investors have piled into the industry seeking to add premium revenue for investment portfolios.

Buffett for years has been highlighting his push beyond insurance, using the phrase “fabulous five” in 2012 to describe BNSF, the energy business, Iscar, Lubrizol and Marmon, which provides engineered wire and cables and motor-vehicle parts.

Adding Precision Castparts would make the group “the spectacular six,” Cunningham said. “A huge acquisition just reinforces the idea that Berkshire is an industrial conglomerate.”

Buffett doesn’t pay a dividend and rarely repurchases shares, meaning he may have to eventually pursue more megadeals, said Meyer Shields, an analyst at Keefe Bruyette &Woods.

“This is going to be a recurring phenomenon where the businesses in the aggregate are spinning off so much cash that you can go out and buy another business,” Shields said before Monday’s deal was announced.

Talk to us

More in Herald Business Journal

David Simpson (left) and Scott Murphy.
Port of Everett candidates spar over transparency

An incumbent, David Simpson, is challenged by Everett City Councilmember Scott Murphy.

Rendering of the new terminal that Propeller Airports plans to build at Paine Field in Everett. The terminal, which will serve the general aviation community, will replace Castle & Cooke Aviation's existing building at the Snohomish County-owned airport. (Propeller Airports LLC)
Propeller Airports to acquire Castle & Cooke at Paine Field

Propeller, which owns the nearby passenger terminal, plans a new complex for private aviation.

Everett Farmer’s Market canceled Sunday due to weather

Organizers cited a high-wind advisory. It is to reopen Oct. 31 for the final market of the season.

FILE - In this May 26, 2020, file photo, a sign at the headquarters for the Washington state Employment Security Department is shown at the Capitol in Olympia, Wash. Washington state's rush to get unemployment benefits to residents who lost jobs due to the coronavirus outbreak left it vulnerable to criminals who made off with hundreds of millions of dollars in fraudulent claims. (AP Photo/Ted S. Warren, File)
Washington’s unemployment rate in September was 4.9%

Employers added 17,600 jobs last month, a 7.3% increase over August.

With the Olympic mountains in the background, the first passenger flight by Alaska Airlines Flight 2878 departs for Portland on opening day of the Paine Field Terminal on Monday, March 4, 2019 in Everett, Wash. (Andy Bronson / The Herald)
Alaska Airlines stalls plan for extra flights in Everett

Business has been sluggish, but the airline says it will offer 12 flights a day at Paine Field in the new year.

Hillside homes in Mukilteo are seen from the ferry line on Oct. 20. (Andrea Brown / The Herald)
Mukilteo asks for input on housing density, and it’s complicated

Here’s a guide to what voters should know about the advisory ballot measure. What does it actually do?

People hold signs in protest of the vaccine mandate after Boeing announced it would terminate workers who do not comply on Friday, Oct. 15, 2021 in Everett, Wa. (Olivia Vanni / The Herald)
Some Boeing workers protest in Everett over vaccine mandate

The Boeing Company announced earlier this week that its workers must be vaccinated by Dec. 8.

FILE - In this file photo dated Monday, March 11, 2019, rescuers work at the scene of an Ethiopian Airlines plane crash south of Addis Ababa, Ethiopia.  The number of deaths in major air crashes around the globe fell by more than half in 2019 according to a report released Wednesday Jan. 1, 2020, by the aviation consultancy To70, revealing the worst crash for the year was an Ethiopian Airlines Boeing 737 MAX on March 10 that lost 157 lives. (AP Photo/Mulugeta Ayene, FILE)
Former Boeing test pilot pleads not guilty in 737 Max case

He’s the first person to be charged with a crime in connection with the Indonesia and Ethiopia crashes.

FILE - In this March 14, 2019 file photo, Ethiopian relatives of crash victims mourn at the scene where the Ethiopian Airlines Boeing 737 Max 8 crashed shortly after takeoff killing all 157 on board, near Bishoftu, south-east of Addis Ababa, in Ethiopia. Relatives of some of the passengers who died in the crash will mark the two-year anniversary of the disaster on Wednesday, March 10, 2021, by seeking a reversal of government orders that let Boeing 737 Max jets fly again.  (AP Photo/Mulugeta Ayene, File)
Boeing pilot involved in Max testing is indicted in Texas

He’s accused of giving the FAA false information about systems that played a role in two deadly crashes.

Top (L-R): Kim Daughtry, Steve Ewing. Bottom (L-R): Gary Petershagen, Marcus Tageant.
Developers court Lake Stevens council incumbents with over $20K

Over half of the campaign dollars for four candidates came from people tied to real estate or property development.

Traffic drives in view of a massive Boeing Co. production plant, where images of jets decorate the hangar doors, Friday, April 23, 2021, in Everett, Wash. (AP Photo/Elaine Thompson)
Boeing says workers must get the COVID vaccine by Dec. 8

“Compliance with these requirements is a condition of employment,” says an internal company presentation.

The Boeing 737 Max 10 airplane landing at Boeing Field in Seattle on June 18. (Chona Kasinger / Bloomberg)
Boeing ramps up 737 Max but 787 deliveries are still blocked

Boeing last month maintained its steady trickle of sales as it navigates the aviation downturn.