US Special Rep on Iran Hook: US supports EU initiating the dispute resolution mechanism in Iran deal but would like them to join our efforts of diplomatic isolation
Warren Buffett Should Buy FedEx. It’s Cheap and Elephant-Sized.
The reasons Wall Street obsesses about Berkshire Hathaway ‘s (ticker: BRK.B) acquisition plans are threefold. First, Berkshire owns many businesses in industries ranging from insurance to manufacturing to logistics. It seems there is no company off limits.
Second, the company is sitting on a cash hoard of more than $125 billion. Almost any company of any size could be snapped up. And third, CEO Warren Buffett says he is looking for “elephant-sized” acquisitions. Berkshire is itching to buy.
“In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own,” wrote Buffett in his 2019 shareholder letter, lamenting the fact he hasn’t bought much lately. “We continue, nevertheless, to hope for an elephant-sized acquisition.”
FedEx declined to comment on market speculation. Berkshire didn’t respond to a request for comment.
Buffett prefers simple-to-understand businesses with good management and so-called competitive moats—business characteristics that ensure rivals can’t eat away at financial returns. Those criteria have led him to amass businesses in a range of industries including manufacturing, retail, consumer staples, home building, insurance, and utilities, among others.
Berkshire also owns transportation and logistics assets including the Burlington Northern Santa Fe railroad, as well as the truck-leasing outfit Xtra. Adding FedEx to the mix would give those businesses economies of scale, and Buffett’s cash would let FedEx battle through headwinds it currently faces without the need to worry about short-term earnings.
Buffett’s conglomerate is one of the few companies that could simply write a check for FedEx. It means a deal could happen without burdening the combined company with interest expenses.
“Berkshire has a great record of being able to squeeze substantial value out of industrials [and] transports,” iDrive Logistics strategist Matt White tells Barron’s. “I personally think a Berkshire offer would have enough cachet to pass muster with Fred Smith.”
Smith is the founder and CEO of FedEx (FDX) and has appeared on Barron’s list of top CEOs. He left the list in mid-2019 after a tough year, but still checks the management-quality box.
FedEx is also cheap right now—another factor Berkshire looks for. Buffett, in fact, lamented “sky-high” prices for “businesses possessing decent long-term prospects” in his annual letter.
FedEx trades for about 13.3 times estimated calendar year 2020 earnings, a discount to stocks in the S&P 500 and Dow Jones Industrial Average. It trades at that multiple, however, because business momentum is going in the wrong direction right now.
Fallout from the U.S.-China trade war has hurt volumes in business-to-business express shipments. What is more, investors worry that FedEx’s long-term returns could suffer as retailers such as Amazon.com (AMZN) begin to handle shipments for e-commerce.
FedEx, for its part, is investing in capacity to make deliveries for online merchants so that it can deliver more packages per square mile. That’s key to long-term profits, but it is hurting returns now.
The idea of a deal isn’t as far-fetched as it might sound. Don’t forget that Wall Street suggested Amazon buy FedEx a year ago. And “the prospect seems to check all the boxes for Berkshire,” adds White.
So will it happen? Predicting any one acquisition is hard. Even if a deal makes sense, the odds of an agreement being struck are low.
Sometimes value investors like to posit what Warren might buy as a way to prompt other investors to think about how low valuations have gone. That is another reason FedEx discussion might be making the rounds recently.
Germany unveils landmark €86bn investment to modernise rail network
Deal establishes Deutsche Bahn as central to Berlin’s ambitious plans to fight climate change
The German government moved to dispel its reputation for not spending enough on the country’s infrastructure as it unveiled a 10-year, €86bn investment programme for the German rail network — the biggest in its history.
The plan foresees a 54 per cent increase in spending compared with the previous funding round, with much of the money earmarked for modernising Germany’s tracks, railway stations, signal boxes and energy supply systems.
“This is the biggest growth, investment and modernisation offensive in the more than 180-year history of the railways [in Germany],” Richard Lutz, Deutsche Bahn’s chief executive, said on Tuesday.
The investment programme establishes DB as central to Berlin’s ambitious plan to fight climate change and shift consumers to less carbon-intensive forms of travel.
Germany has committed to cutting its transport sector CO2 emissions by up to 42 per cent by 2030, and wants to achieve that by encouraging more people to travel by rail.
The government’s plan is to vastly increase the number of customers using Deutsche Bahn’s long-distance trains from 148m in 2018 to 260m by 2030. Last year ministers moved to make rail travel cheaper by reducing value added tax on long-distance train tickets.
But the Bahn suffers from an image problem in Germany, with frequent complaints about the quality of the service. Just 76 per cent of its long-distance trains were on time in 2018, well below the official punctuality goal of 82 per cent.
Thanks to the new injection of funds from the deal, which was signed by Andreas Scheuer, Germany’s transport minister, Mr Lutz and Ronald Pofalla, DB’s head of infrastructure, that should now improve. “We have the task of creating a modern rail network that is more punctual, more reliable, more efficient, with more passengers and freight travelling by rail,” Mr Scheuer said.
Olaf Scholz, Germany’s finance minister, who was also at the signing ceremony, said: “The big issue right now is how to stop climate change, and we’ll never be able to do that without an efficient rail infrastructure.”
Under the agreements, the German government will pay €62bn towards the investment programme, and Deutsche Bahn itself €24bn. DB’s dividends will also be completely reinvested in the business.
The money will go towards modernising 2,000km of rail track and 2,000 switches a year. Some 2,000 bridges will be refurbished by 2030, while €7bn alone will be invested in signal boxes.
But the main railway trade union, EVG, has criticised the figure of €86bn as inadequate. Alexander Kirchner, the union’s head, said last year that the railway network had been neglected for decades and that had resulted in a “huge investment backlog that is currently running at €60bn a year”.
Calls for greater investment across the board increased after the finance ministry revealed on Monday that it had recorded a €13.5bn budget surplus for last year, the highest on record — partly as a result of lower interest payments. The previous record, in 2015, was €12.1bn.