to a value of north of $60bn, which is in our sum-of-the-parts valuation analysis.
Utilities and Energy Businesses
Turn on the Lights: MidAmerican Holdings Company
Berkshire owns 89.8% of MidAmerican, a major global utility and energy company. Businesses include regulated utilities (PacifiCorp and MidAmerican), natural gas pipelines and a UK electric company (Northern Powergrid). MidAmerican also includes a real estate brokerage business. While growth rates slowed and margins tightened during the recent recession, the energy businesses proved to be remarkably stable in face of the downturn due in part to the regulated aspect of the business.
Coming off a slow-growth period during the prolonged economic weakness, the company should see a double-digit rebound in growth in 2013, slowing to a mid-single-digit rate thereafter, we believe.
Manufacturing, Service and Retail
The Manufacturing, Service and Retail (MSR) segment of Berkshire, accounting for approximately a third of Berkshire’s earnings, groups together a large number of diverse businesses, from NetJets to See’s Candies. Marmon, the largest operating company, includes approximately 150 manufacturing and service businesses itself and is organized into 11 business sectors, with the largest being Union Tank Car, which leases tank cars to shippers such as oil companies. McLane is a wholesale distributor of consumer goods to retail stores.
Other well known businesses are Acme Building, Benjamin Moore, Johns Manville, MiTek, Shaw, Lubrizol, Businesswire, TTI, Dairy Queen, Buffalo News, Borsheims and Helzberg Jewelers, Pampered Chef, and the list goes on. Among the major businesses of Berkshire and due to the more consumer-sensitive aspect of the retail operations, MSR has shown the most economic sensitivity among the portfolio of Berkshire segments, although, as we show below, profitability has remained intact.
The businesses in MSR enjoy advantages that include size and brand. McLane, for example, is the largest distributor to Wal-Mart. Brooks running shoes are known as costly but geared for “the running geeks.” Nebraska Furniture Mart is the largest home furnishing store in North America. As the U.S. consumer slowly recovers, we expect mid-teen earnings growth through 2014 at MSR.
Finance and Financial Products
“The Weapons of Financial Destruction”
The smallest of the major segments, FFP includes rental companies (XTRA and CORT), the leading producer and financer of manufactured homes (Clayton), Berkadia (a commercial mortgage 50% joint venture with Leucadia) and Berkshire’s position in the derivatives market. While the derivatives portfolio had received negative press due to Mr. Buffett’s prophetic “weapons of mass financial destruction” comments in regard to derivatives, Berkshire’s portfolios are long–term, plain vanilla credit default and equity index put options. While the portfolio’s value has shown the expected volatility over the past several years, there has been little cash collateral payments required, much as Mr. Buffett claimed when he first wrote the contracts. Given the difficulty in modeling the returns of the equity-market linked derivatives, we have modeled for flat earnings in this segment.
Heinz
Berkshire recently announced its intension to purchase 50% of H.J. Heinz (of ketchup fame). Berkshire will invest $4bn for common equity in the holding company and $8bn in preferred shares (which will pay a 9% dividend to Berkshire) with warrants to buy an additional 5% of equity. A small group of investors led by Brazilian businessman Jorge Paulo Lemann will own the other 50%.
“All I Want in Life Is an Unfair Advantage”
“A growing capital base is a problem like aging, it is better to have it grow than to be “solved” (Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s annual report, 1988). Much like Mr. Jain enjoys at BHRG, Mr. Buffett has a capital base and reputation that gives him a favored perch from which to make investments. When a financial institution wants the world’s most credible backstop, Mr. Buffett gets a call. The terms and structures of Berkshire’s investments in Goldman Sachs, GE Capital and Bank of America, included attractive cash dividends and warrants. For Berkshire, the deals were relatively low risk and high return.
After Berkshire’s purchase of Heinz, we estimate that the company will hold $35bn of cash, well above the $20bn cash cushion that Mr.
