Industrial Sector Ideas

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Precision Castparts -- >>> Why a Takeover of Precision Castparts Would Be Signature Buffett



http://blogs.wsj.com/moneybeat/2015/08/08/why-a-takeover-of-precision-castparts-would-be-signature-buffett/?mod=yahoo_hs



A Berkshire Hathaway Inc.BRKA -1.11% takeover of Precision Castparts Corp.PCP +19.08%, if it happens, would be a signature Warren Buffett deal in several respects.

For one, Berkshire, led by Mr. Buffett, has had a few years to get familiar with the Portland, Ore.-based manufacturer of components for aircrafts, power stations and oil-and-gas equipment. Berkshire began buying shares in 2012 and continued to add to its position through periods when the stock was trading above $200.

Along similar lines, Berkshire in 2010 bought the 77% of Burlington Northern Santa Fe Railroad that it didn’t already own, for $26 billion.

Also, Precision Castparts shares have fallen in recent months as the company has said it faces uncertainty in its businesses that cater to the oil and gas industry. It has reduced headcount and recorded charges tied to depressed demand from these customers. On Friday, Precision Castparts’s shares closed at about $194; they are down about 20% year to date. While such a decline might give others pause, a traditional value investor like Mr. Buffett would see that downdraft as an opportunity.

Berkshire “appears to be buying at a time when the shares are a bit out of favor, a classic Berkshire move,” Nomura analyst Clifford Gallant, who covers Berkshire, said on Saturday.

Finally, it is the kind of nuts-and-bolts industrial company that attracts Mr. Buffett, such as its BNSF railroad, utilities or grocery distributor McLane. Their job is to help other businesses succeed. Precision’s clients include some of the aerospace industry’s heaviest hitters, including Airbus Group SE, Boeing Co.BA +2.42% and General Electric Co.GE +1.26%

Even with its shares down, Precision Castparts is a pretty big company, with a market capitalization of about $27 billion. Based on average deal premiums, Berkshire would likely be paying more than $30 billion to acquire the company — making it Berkshire’s largest-ever deal.

Berkshire had $67 billion of cash on its books as of the end of the second quarter. Mr. Buffett has said he likes to keep a cushion of $20 billion. But that leaves a hefty $47 billion in the bank. Mr. Buffett doesn’t like to use Berkshire’s stock to pay for deals, so Berkshire could use a combination of its own cash and some financing to pay for Precision Castparts.

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