TheChek News Flow

Legendary investor’s biggest deal ever is a bet on the boom in aerospace manufacturing

Warren Buffett’s Berkshire Hathaway Inc. on Monday said it agreed to buy Precision Castparts Corp. for about $32 billion in cash in what would be the conglomerate’s largest takeover ever.

The offer of $235 a share is a 21% premium to Precision’s closing price of $193.88 a share on Friday. Including debt, the deal is valued at $37.2 billion.

Shares of Precision Castparts added 19% to $231 in morning trading. The stock started the year trading as high as $242.20 but has since fallen amid weakness in the energy markets. Berkshire’s Class A shares fell 0.6% to $214,204.89.

Portland-based Precision Castparts supplies parts such as fasteners and turbine blades to aircraft makers, and it makes pipes and other equipment for power stations and the oil-and-gas industry. Last year, nearly three-quarters of Precision’s sales were to the aerospace industry, the rest coming from the energy and power sectors.

The deal amounts to a bet by Mr. Buffett that airlines will continue driving a boom in aerospace manufacturing. The aerospace industry is undergoing a wave of consolidation as airplane makers boost output after winning orders for thousands of new jets.

Berkshire is already one of the company’s largest shareholders, with a 3% stake. As part of the agreement, Precision Castparts will become a unit of Berkshire, keeping its name and Portland headquarters. The transaction is subject to shareholder and regulatory approval but is expected to close in the first quarter of 2016.

The deal, first reported by The Wall Street Journal on Saturday, is Berkshire’s largest ever and represent the latest megamerger in a robust year for deal making.

In an interview with CNBC on Monday morning, Mr. Buffett said the deal will take Berkshire out of the market for other big acquisitions over the next 12 months as the company rebuilds its cash trove. Mr. Buffett said he expects to borrow about $10 billion to fund the deal.

“This takes us out of the market for an elephant,” he said. “This means we have to reload over the next 12 months or so.”

Still, Mr. Buffett noted that Berkshire will probably make a few smaller deals in the coming months.

Bringing Precision Castparts into its fold would change the makeup of the Omaha, Neb., conglomerate yet again. Through a string of big acquisitions over the past decade, Berkshire has transformed itself from a company whose earnings came largely from its insurance businesses to one that pulls in income from a railroad, utilities, industrial manufacturers, home builders, branded-food sellers and even an auto dealership.

Mr. Buffett is fond of saying Berkshire owns 9 1/2 companies that are so large they would belong in the Fortune 500 if they were stand-alone companies. Precision, with annual revenue of $10 billion and profit of $1.5 billion, would add to that tally.

The deal also represents one of the larger deals in the most active year for M&A since the peak year of 2007. It comes just months after the roughly $50 billion merger of Kraft Foods Group and H.J. Heinz, half of which was owned by Berkshire.

During the CNBC interview, Mr. Buffett played down speculation that Kraft Heinz could buy snacks giant Mondelez International Inc.

Last week, high-profile activist investorWilliam Ackman unveiled a $5.5 billion stake in Mondelez, a giant bet that the maker of Oreo cookies and Ritz crackers will become the biggest target in a wave of consolidation reshaping the food industry. Kraft Heinz Co. was seen as a potential suitor.

Mr. Buffett said a deal with Mondelez, or any big food company, is unlikely in the near term.

“At Kraft Heinz, we have our work cut out for us for a couple of years,” he said. “Frankly, most of the food companies sell at prices that it would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz.”

Precision Castparts, meanwhile, has grown rapidly through a series of acquisitions, but its stock price has been weighed down by a series of production problems, destocking by one of its largest customers and the exposure of its pipeline business to the oil-and-gas sector.

Over the past five years, the company’s shares have underperformed the S&P 500 by nearly 30 percentage points. Its price as a multiple of forward estimated earnings has traded at a discount to that of the broader market since the start of this year.

Last month, the company fell short of Wall Street estimates for its fiscal quarter ended June, as profit fell 17%. Precision Chief Executive Mark Donegan told analysts that demand for the company’s products remained depressed among oil-and-gas industry customers. It had targeted the oil-and-gas sector as a growth market, but the recent fall in oil prices has hurt the company.

The deal takes Mr. Buffett back to his fundamentals. Precision uses complex, proprietary technology to make components for some of the world’s biggest aerospace companies. Given the nature of its business, the barriers to entry are likely high for new competitors, providing Precision with the kind of “economic moat” that lets companies thrive over the long term.

It also would be a way for Berkshire to use a chunk of its giant cash hoard. Mr. Buffett has said he likes to have a cushion of $20 billion at all times, but Berkshire’s cash totaled nearly $67 billion at the end of the second quarter.

At the 2014 annual meeting, Mr. Buffett said he was willing to make a deal of up to $50 billion, using cash and borrowing at low interest rates. In 2010, he used a mix of cash and stock to pay for Berkshire’s largest deal to date, the $26 billion purchase of the 77% of BNSF Railway Co. it didn’t already own.

Credit Suisse, Cravath Swaine & Moore LLP and Stoel Rives LLP advised Precision Castparts on the deal.