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Berkshire shares underperform as investor passes on big deals, balking at prices

When Tiffany & Co was looking for an alternative suitor after receiving a takeover approach from LVMH, the US jeweller turned to a longtime admirer: Warren Buffett.

But although Mr Buffett had bailed out Tiffany during the financial crisis, he politely rejected its advances this time, according to people briefed on the matter. Mr Buffett confirmed the conversation took place.

That cleared the way for LVMH to press ahead with its acquisition of Tiffany in November, eventually agreeing to pay $16.6bn, including debt, after raising its bid to win board approval. 

It also left Mr Buffett’s Berkshire Hathaway in a familiar position: sitting out a blockbuster deal.

The company has not made what its 89-year-old founder calls an “elephant-sized acquisition” for four years, and its cash pile has swollen to a record $128bn, earning little interest with rates near historic lows and acting as a drag on profits.

The cash building on the Berkshire balance sheet now represents nearly a quarter of its market capitalisation and provides enough firepower to buy all but a few dozen of the companies on the S&P 500.

Class-A shares of Berkshire have gained 11 per cent this year, trailing the 31.5 per cent rise of US stocks with dividends invested, making 2019 the company’s worst year in a decade in comparison with the broader market. 

“There are investors that are frustrated,” said Jim Shanahan, an analyst with investment company Edward Jones. “He’s flush with liquidity and will be ready when opportunities emerge, but we need a pullback here for those opportunities to emerge.”

Since agreeing to pay $32bn for Precision Castparts in 2015, the doyen of the investing world has warned his shareholders repeatedly that he may struggle to clinch another big acquisition, saying in his annual letter in February that “prices are sky-high for businesses possessing decent long-term prospects”.

Mr Buffett has long admired Tiffany as a potential acquisition, according to bankers who have advised him, and he bought $250m of bonds when the retailer was in distress after the 2008 financial crisis. Tiffany would have complemented Borsheims, the Nebraska jeweller Berkshire acquired 30 years ago, to which shareholders flock during Mr Buffett’s annual meeting in Omaha.

Filings from Tiffany last week showed that the jeweller’s advisers at Centerview and Goldman Sachs approached four potential alternative bidders but none was interested in outbidding LVMH. The filings did not name Mr Buffett or the other potential bidders.

One of the few options Mr Buffett found appealing this year was a $10bn investment in Occidental Petroleum, a deal that funded the oil group’s takeover of Anadarko Petroleum. While not considered an “elephant” — it was not a takeover, but rather an investment in new preferred shares and warrants — it did pay Berkshire a handsome $800m annual dividend.

Record high stock prices have inflated the type of cheap, overlooked companies that Mr Buffett — an ardent value investor — has built a fortune purchasing at bargain prices. He has had to adapt his approach.

In November, Mr Buffett quietly bid $5bn on technology distributor Tech Data after he received word from Bank of America that the company was planning to sell itself to private equity behemoth Apollo Global Management. Apollo ultimately sweetened its bid, and Mr Buffett, who is known for being loath to enter auctions for publicly traded companies, backed away.

“There’s a lot of capital on the sidelines,” said Mr Shanahan. “Private equity firms have a lot of capital to put to work and they’re willing to be more aggressive than he is.”

Mr Buffett has also softened his approach to buybacks, acquiring Berkshire’s own stock, and widened the net for buying shares of other blue-chip companies. 

In 2016, two of Mr Buffett’s investing deputies, Todd Combs and Ted Weschler, bought Apple shares, an eyebrow-raising move since their boss had long shunned technology companies. Berkshire has slowly built the stake and today the $72bn position is the group’s largest public equity holding. Berkshire also bought a stake in Amazon earlier this year, an investment valued at $930m in a November regulatory filing

For some Berkshire investors, many of whom agree the US stock market is overpriced, Mr Buffett’s patience is welcome.

“Buffett has the luxury to move slowly on purchases because of Berkshire’s cash hoard,” said Berkshire investor Bill Smead, of Smead Capital Management. “Shareholders will benefit tremendously when he puts that money to work.” 

Elon Musk’s electric car company might report record quarterly deliveries Thursday, but a look under the hood is less pleasing

Tesla Inc. TSLA 0.88% ended 2019 with a near-record valuation thanks to a nearly 70% rally in the stock price since late October. But investors should be careful not to confuse a buoyant stock price with a sustainably profitable business.

Fourth-quarter vehicle deliveries, expected later this week, might keep the momentum going. Analyst consensus calls for Tesla to deliver 106,000 cars in the quarter, according to FactSet. That would be a record for the electric auto maker and amount to roughly 17% unit growth from a year earlier. Wall Street analysts expect nearly $50 billion in annual revenue by 2022, which would be more than double 2019’s projected total.

Still, evidence abounds that Wall Street should curb its enthusiasm. Hitting that figure would mean Tesla barely met the low end of its 2019 guidance, which originally called for 360,000 to 400,000 deliveries. At the end of 2018, Tesla said it was selling vehicles at an annualized rate of 350,000. While record deliveries helped Tesla eke out a small third-quarter profit, total revenue fell by 8%. The car company has booked a cumulative net loss of more than $3 billion since sales of the Model 3 sedan began in 2017. Delivery figures should be flattered by the fact that Tesla began selling its Model 3 sedan in overseas markets in 2019.

Tesla hasn’t traditionally broken out vehicle deliveries by country for investors, but U.S. automotive revenue fell by 40% from a year ago in the third quarter. The loss of federal tax credits for new Tesla buyers won’t help. Evidently fleeting interest from U.S. buyers should raise questions about how long current strength in markets like China or the Netherlands can persist. So should the introduction of more electric competitors.

With the stock now trading above 70 times 2020 adjusted earnings estimates and worth twice as much as Ford Motor Co. , Tesla shareholders appear comfortable. That might prove an expensive bet to make.

Aim of associates was to help spirit him to a more friendly legal environment

Carlos Ghosn’s escape to Lebanon from Japan followed weeks of planning by associates aimed at getting the former auto executive to a country they believed would provide a more friendly legal environment to try the claims of financial wrongdoing against him, according to people familiar with the matter.

Last weekend, a team assembled to carry out his exfiltration sprung the plan into action with the aid of accomplices in Japan, one of these people said. Mr. Ghosn was spirited from his court-monitored residence in Tokyo onto a private jet, bound for Turkey. Mr. Ghosn then continued by plane to Lebanon, landing there early Monday morning, according to people familiar with the matter. There, he met his wife, Carole Ghosn, who played a major role in the operation, these people said.

In a text message to The Wall Street Journal, Mrs. Ghosn described being reunited with her husband as the “best gift of my life.”

Mr. Ghosn’s plan, one of these people said, is to clear his name by seeking a trial in Lebanon, his ancestral homeland and a place where he is regarded as something of a national hero. Mr. Ghosn’s advocates believe that under Lebanese law, prosecutors there could work with Japanese counterparts to bring a case—albeit in conditions Mr. Ghosn regards as more favorable than those in Japan, according to this person.

Japanese prosecutors haven’t yet commented on the move, but have previously defended their legal system and said Mr. Ghosn would get a fair trial. Lebanese law allows for citizens to be prosecuted for crimes committed overseas, as long as the offense is a crime in Lebanon, too. Whether Lebanese, or Japanese, authorities would agree to take that legal route—if applicable to Mr. Ghosn—wasn’t known.

Back in Japan, Mr. Ghosn, the former leader of Renault SA, RNO -0.99% Nissan Motor Co. NSANY 0.22% and Mitsubishi Motors Corp. , is charged with financial crimes, including causing Nissan to fail to report more than $80 million in planned future income on the company’s financial statements and directing Nissan money to be spent for his personal benefit. He said he was innocent of all the charges, and vowed to fight those charges in a trial that was expected to kick off in 2020.

Mr. Ghosn’s escape surprised his own lawyer in Japan. Junichiro Hironaka said he last saw Mr. Ghosn on Dec. 25, and was planning to meet him again in January. He said, without providing details, that Mr. Ghosn’s flight might have taken a “big organization” to arrange. He said the legal team was still holding Mr. Ghosn’s French, Lebanese and Brazilian passports.

Mr. Ghosn’s decision to take flight has its roots in what he perceived to be his mistreatment by a legal system that he believes is stacked against defendants. “I have not fled justice—I have escaped injustice and political persecution,” he said in a statement emailed to reporters on Tuesday morning. He complained of “a rigged Japanese justice system where guilt is presumed.”

The former auto executive, who claims he was victimized in a Nissan-Renault tug-of-war, spent more than four months in jail, over two stints, before the court ordered his release on bail in late April. But he particularly bristled on restrictions that the court placed on his contact with his wife, according to people familiar with the matter.

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Then the court gave Mr. Ghosn what he took as a double insult for Christmas, according to people familiar with the matter. First it denied his request to have contact with his wife for the holidays. And at a Christmas Day hearing, he believed the court was dragging its feet on the trial, leading him to fear it might not start until 2021, the people said.

“He couldn’t see his wife. He couldn’t get dates for his trial,” one of the people said. “It was humiliation. It was moral torture.”

Behind the scenes, according to people familiar with the matter, Mr. Ghosn’s advisers had been studying several scenarios to spare him a Japanese trial, where more than 99% of those indicted are convicted, according to official statistics. Lawyers and family members appealed to French leaders to intervene, for instance. They also looked at what would happen if he ended up in France, Brazil or the U.S., according to one person familiar with the matter.

The Tokyo District Court told Japanese media it formally revoked Mr. Ghosn’s release on bail. That means the government will confiscate the ¥1.5 billion ($13.8 million) in bail money Mr. Ghosn paid.

It couldn’t be learned exactly how Mr. Ghosn was able to slip away from Japanese authorities in order to get on the private jet that spirited him out of the country. Mr. Ghosn had been living in a house in Tokyo. While he was permitted to leave the house, he had been required to stay in the country pending his trial.

Flight-tracking data details only one journey that matches Mr. Ghosn’s movements between Japan and Lebanon. A long-range Bombardier business jet left Kansai International Airport near Osaka—about a six-hour drive west from Tokyo—on Sunday at 11:10 p.m. Traversing Russian airspace, the plane arrived Monday morning at Ataturk Airport in Istanbul, according to flight-tracking data. A smaller jet operated by the same company, Turkey-based MNG Jet Havacılık AS, left the airport for Beirut just over half an hour later, the data show.

A person who answered the phone at MNG Jet declined to comment.

It wasn’t immediately known whether Mr. Ghosn had to go through customs at Ataturk Airport before embarking on the second leg of his trip to Beirut. On Wednesday, Turkish Interior Minister Suleyman Soylu was quoted by daily newspaper Hurriyet as saying that he had found no trace in official records of Mr. Ghosn making a recent stopover in Turkey.

Mr. Ghosn entered Lebanon with a French passport and a Lebanese identification card, according to a person familiar with the matter. Officials in Beirut on Tuesday said he arrived in the country legally and authorities wouldn’t take any action against him.

Mr. Ghosn now faces the prospect of an extended stay in Lebanon, should Japan decide to pursue an international arrest warrant. Lebanon doesn’t have an extradition treaty with Japan.

Mr. Ghosn is staying in Lebanon with his wife in a family house, which has a surveillance system, according to people familiar with the matter. Mr. Ghosn fears being snatched and returned to Japan, one of the people said.

A rose-colored mansion in an upscale neighborhood that Nissan had purchased and renovated for Mr. Ghosn’s use was being guarded Tuesday by a police car and armed officers; Mr. Ghosn, though, isn’t staying there, according to people familiar with the matter. A shopkeeper next to the house said that police weren’t usually stationed on the street, even on New Year’s Eve.

“We are here on a mission to guarantee law and order,” one of the officers said.