Buffett Gets 20% of Munger's Wesco - Analyst Blog

Yesterday, Waren Buffett, the chairman and CEO of Berkshire Hathaway Inc. (BRK.A, BRK.B) announced its intention to buy 20% of Wesco Financial Corp. (WSC), a company run and controlled by Charles T. Munger.

Following approval by shareholders’ of both the companies, the Wesco deal will be financed by a combination of cash and Class-B shares (Buffett uses Class-B shares for acquisitions) based on the book value to the acquiring company. As per book value of $353 per share at the end of June 30, 2010, the deal will cost $514 million to Buffett.

Pasadena, California based Wesco is 80.1% owned by Blue Chip Stamps (Blue Chip), a wholly owned subsidiary of Berkshire since 1973. Thus, Wesco and its subsidiaries are controlled by Blue Chip and Berkshire. All of these companies may also be deemed to be under the control of Buffett, who owns of 24.3% of Wesco’s stock.

Munger is also the vice chairman of Berkshire and consults with Buffett on Wesco’s investment decisions, major capital allocations and the selection of chief executives to head each of its operating businesses.

Wesco’s activities fall into three business segments – insurance, furniture rental and industrial. The insurance segment consists of the operations of Wesco-Financial Insurance Co. and Kansas Bankers Surety Co. The furniture rental segment consists of the operations of CORT Business Services Corp. The industrial segment comprises Precision Steel’s service center and industrial supply operations. Wesco also holds shares in some of the same companies as Berkshire, like Coca-Cola (KO), Kraft (KFT), Procter & Gamble (PG), and Wells Fargo (WFC).

Wesco continues to have a strong consolidated balance sheet, with high liquidity and relatively little debt. Its equity investments are in strong, well-known companies. Wesco reported a 1.8% year-over-year increase in 2009 revenues to reach $813.3 million.

Buffett intends to convert Wesco into a wholly owned subsidiary of Berkshire, to deploy enormous cash of approximately $28 billion at Berkshire and also to simplify operations at Wesco. Besides Munger is already 86 and would not carry on with the role of its chairman for long.

Berkshire houses a diverse array of over 80 businesses which are categorized into – Insurance, Regulated Utility, Manufacturing, Service & Retail and Finance & Financial Products. Some of the companies, which run these businesses are 100% owned, some are owned upto 80% while other positions merely involves big blocks of stocks.

Berkshire reported a strong second quarter 2010 with EPS of $1.24, beating the Zacks Consensus Estimate of $1.01 on the back of an increase in revenues from its economic sensitive business – Utilities & Energy and Manufacturing, Service & Retailing. The most recent acquisition of Burlington Northern, a railroad company, was the main contributor to the earnings.
 
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