Tuesday, March 15, 2011

Well Oiled Machine

The latest Buffett acquisition looks like another great deal for Berkshire and its shareholders. Maybe it's time to create an ETF built around the companies he's most likely to buy.

Buffett Still Gets Lubrizol at Lehman-Bust Price After 183% Gain: Real M&A

March 14 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Lubrizol Corp., the world’s largest producer of lubricant additives, for about $9 billion in the cash-flush investor’s second-biggest acquisition in the past five years. Berkshire will pay $135 a share in cash, 28 percent more than Lubrizol’s closing share price on March 11, the Omaha, Nebraska-based company said in a statement today.

Warren Buffett is still getting the same discount for his takeover of Lubrizol Corp. (LZ) even after the maker of engine lubricant almost tripled since the billionaire investor said it was time to start buying U.S. equities.

Berkshire Hathaway Inc. (BRK/A) will pay about $9 billion for Lubrizol in its second-largest purchase since Buffett said in October 2008 he was staking his personal fortune to American stocks. While Lubrizol surged 183 percent over that span, its equity and net debt was valued at 5.8 times earnings before interest, taxes, depreciation and amortization prior to yesterday’s announcement, according to data compiled by Bloomberg. That compares with 5.7 times when Buffett made his comments a month after Lehman Brothers Holdings Inc. collapsed.

Even with a 24 percent premium, the Ebitda multiple that Buffett is paying for Wickliffe, Ohio-based Lubrizol is still the cheapest for a specialty chemicals company in 12 years, data compiled by Bloomberg show. Lubrizol has doubled earnings and its operating margin in the past two years and controls 35 percent of sales in an industry dominated by four companies.

“Being an excellent investor means you don’t overpay,” said Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees $7 billion. “It’s a pretty good deal for Buffett in terms of the kind of stuff that he tends to gravitate towards.”

Barish’s $1.44 billion Cambiar Opportunity Fund (CAMOX) has outperformed 99 percent of rival funds over the past year.

‘Major Acquisitions’

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer. Julie Young, a spokeswoman for Lubrizol, didn’t respond to a telephone call and e-mail.

The Lubrizol deal comes two weeks after the billionaire said in his annual letter to shareholders on Feb. 26 that he was looking for “more major acquisitions,” a year after spending $26.5 billion to buy Burlington Northern Santa Fe railroad in his largest purchase.

Buffett said Omaha, Nebraska-based Berkshire, whose cash rose to a three-year high of $38.2 billion, needed more buyouts and that his “trigger finger is itchy.”

Lubrizol, the world’s largest producer of lubricant additives, was one of more than 40 companies that Bloomberg identified this month that fit criteria listed in his letter.

Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, according to his report. His takeover strategy has shifted as Berkshire has grown to focus on “capital intensive businesses,” such as power producers and railroads, which require consistent investment in infrastructure and equipment.

Relative Value

Lubrizol’s capital expenses in the past 12 months accounted for 15 percent of net fixed assets, and its average price- earnings ratio over five years was 11.9, data compiled by Bloomberg show.

The maker of engine lubricant posted a return on equity of 34 percent last year, the highest for a company taken over in the specialty chemicals industry in a deal worth more than $1 billion since Inspec Group Plc in 1998, the data show.

Lubrizol also makes plastics used in pipes, auto parts and electronics; Carbopol polymer for personal-care products such as hair gel; and acrylic resins and other materials for coatings.

Berkshire is acquiring Lubrizol after its stock reached a high of $114.81 on Oct. 25, 2010. The shares climbed 183 percent from Buffett’s comments in October 2008 to $105.44 on March 11, the last day of trading before the deal was announced. Lubrizol fell 72 cents to $133.96 at 9:48 a.m. on the New York Stock Exchange after surging 28 percent yesterday.

‘Got Good Value’

“The stock has gone up a lot,” said John Carey, a Boston- based money manager at Pioneer Investments, which oversees about $250 billion. “He’s not getting it at as cheap a price as he might have. He evidently feels that it’s still got good value.”

Lubrizol’s trailing 12-month Ebitda doubled during the same period to $1.26 billion, keeping the company’s enterprise value -- or the sum of its equity and debt minus cash -- to Ebitda multiple little changed, data compiled by Bloomberg show.

Buffett wrote in the New York Times on Oct. 17, 2008, that exaggerated concern about the long-term prosperity of financially secure U.S. companies was foolish, and most would be setting profit records in years to come. A month earlier, New York-based Lehman had filed for the largest bankruptcy in history, deepening a global credit crisis and the worst American recession since the Great Depression.

‘Run the Math’

The $135-a-share price for Lubrizol represented a premium of 24.2 percent over the 20-day trading average. That’s in line with the 24.8 percent average for Berkshire takeovers, according to data compiled by Bloomberg.

“I don’t even need to run the math,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which manages $341.3 billion. “I’m completely confident that he has established the normal parameters of his valuation disciplines.”

The agreement to buy Lubrizol at 7.3 times Ebitda is the cheapest takeover of a specialty chemicals company greater than $500 million since Imerys SA (NK) in Paris paid 5.4 times for English China Clays in 1999, according to data compiled by Bloomberg.

The bid is even lower at 6.7 times estimated 2011 Ebitda of $1.38 billion, according to the average of analysts’ estimates compiled by Bloomberg.

“Berkshire is getting an attractive valuation,” said Laurence Alexander, a New York-based analyst at Jefferies Group Inc. who recommends buying the shares. “The deal suggests Berkshire is more upbeat about the sustainability of margins.”

‘Worry About’

Lubrizol has the largest share in the lubricant additives industry, where more than 90 percent of sales are controlled by four companies, said Michael Sison, a Cleveland-based analyst at KeyBanc Capital Markets. They have been able to raise prices to recoup oil-based raw materials costs and limit capacity additions, he said.

“Pricing power seems to be something that this company does not have to worry about,” Dmitry Silversteyn, an analyst at Longbow Research in Independence, Ohio, said of Lubrizol.

Lubrizol’s operating margin, or the amount of income retained for each dollar of sales, climbed to 20 percent last year from 9.1 percent in 2008.

The company’s lubricant additives business brought in $3.9 billion, or 72 percent of revenue last year, while advanced materials made up 28 percent of sales.

‘American Industry’

“It’s a relatively easy business to understand and one that Buffett can really get his arms around at a decent price,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion and owned Lubrizol shares as of Dec. 31. “Future growth prospects are rather predictable. It’s a Buffett bet on industrial growth, on the growth of American industry.”

The Lubrizol acquisition now leaves Buffett with about $29 billion in cash, data compiled by Bloomberg show.

With Berkshire generating almost $1 billion in free cash flow a month and near zero percent interest rates limiting returns in fixed-income markets, Buffett will probably be eyeing more takeovers, Cambiar’s Barish said.

Excluding Lubrizol, there are still 34 companies with market values from $4 billion to $20 billion that have capital expenses accounting for at least 5 percent of their net fixed assets; a return on equity exceeding 10 percent; profit growth in the past five years that ranked in the top 50 percent; and an average price-earnings ratio in that span that was less than the median in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

Buffett’s Criteria

The list includes discount retailer Dollar Tree Inc. (DLTR) of Chesapeake, Virginia; Hormel Foods Corp. (HRL), the Austin, Minnesota- based maker of Spam luncheon meat; and Joy Global Inc. (JOYG), the Milwaukee-based mining-equipment maker that sells drills and shovels.

“It sounds like he does intend to buy more stuff,” said Cambiar’s Barish. “He really does want to get cash to work in good businesses that are durable franchises that will benefit from economic strength. That’s clearly what he’s trying to do.”

Overall, there have been 4,604 deals announced globally this year, totaling $457.7 billion, a 13 percent increase from the $403.6 billion in the same period in 2010, according to data compiled by Bloomberg.

Labels: , , , , ,


Post a Comment

<< Home