Berkshire CEOs Spend Quietly, Match Buffett on Heinz Deal

Bloomberg May 10, 2013 1

Warren Buffett stole headlines when he committed $12.1 billion in a deal to take ketchup maker HJ Heinz Co. (HNZ) private this year

BNSF Chief Executive Officer Matt Rose

Warren Buffett stole headlines when
he committed $12.1 billion in a deal to take ketchup maker HJ
Heinz Co. (HNZ)
private this year. Managers at his Berkshire Hathaway
Inc. (BRK/A)
spent as much in 2012 while attracting less attention.

Executives who gathered last week for Berkshire’s annual
meeting in Omaha, Nebraska, said in interviews that they plan to
spend even more this year as they upgrade a rail network and
energy utilities, expand manufacturing capacity and hunt for
additional acquisitions.

Buffett, 82, relies on chief executive officers of the
operating units to make deals and invest in plant and equipment
to build the businesses and widen their competitive advantage.
That helps slow the accumulation of cash and reduces the need
for Buffett, Berkshire’s chairman and CEO, to find other uses
for the money.

“If I don’t take my own cash flow and reinvest, all I do
is add to his problems,” said James Hambrick, CEO of chemical
maker Lubrizol, which Berkshire bought in 2011.

Hambrick’s unit plans to spend about $1.4 billion over the
next three years as it replaces equipment and adds capacity to
manufacture products like chlorinated polyvinyl chloride, a
plastic that’s used for pipes in buildings. Even after similar
spending and acquisitions in recent years, Lubrizol has still
sent money to Omaha for Buffett to allocate, Hambrick said.

Spending More

Capital spending at Berkshire climbed 19 percent to $9.78
billion in 2012 from a year earlier, driven by railroad
Burlington Northern Santa Fe and utility owner MidAmerican
Energy Holdings. Both use their cash flows and issue debt for
regular investments in property, plant and equipment. Berkshire
subsidiaries spent about $2.3 billion on 26 acquisitions in
2012, according to the company’s annual report.

Buffett agreed in February to spend $8 billion for a
preferred stake and $4.12 billion for half the common equity in
a new holding company that will own Heinz. The rest will be
controlled by Jorge Paulo Lemann’s 3G Capital.

Berkshire shareholders should “delight” in the spending
because Buffett and his deputies have a track record of using
funds wisely, said James Armstrong, president of Henry H.
Armstrong Associates, a Pittsburgh-based investment manager that
oversees about $400 million, including Berkshire shares.

“You’re not going to see a lot of wasted money,” he said
in a phone interview.

‘Opportunities Abound’

Buffett praised the spending by his deputies this year in
his letter to shareholders. Berkshire will keep its “foot to
the floor and will almost certainly set still another record for
capital expenditures in 2013,” he wrote. “Opportunities abound
in America.”

The dealmaking and expansion plans of Berkshire’s managers
have helped reduce pressure on Buffett to allocate its cash
pile, which climbed to a record $49.1 billion at the end of
March. Buffett used funds from insurance units to buy whole
businesses and build the largest equity stakes in Coca-Cola Co.,
American Express Co. (AXP) and other publicly traded firms.

While Buffett is still seeking to buy companies and invest
in stocks, Berkshire’s model has shifted to more capital-intensive businesses in the last 15 years as he added the
railroad, MidAmerican, Lubrizol, industrial manufacturer Marmon
and Israeli toolmaker Iscar.

Insurance operations including Geico have also been
expanding. Buffett said last week that his company is planning
to get into commercial insurance “big time” after hiring four
executives from American International Group Inc.

Bigger Railroad

BNSF plans to increase capital spending to a record $4.1
billion this year as the railroad prepares for rising oil
shipments and expands terminals that can handle containers that
move by rail, road and sea. That includes $2.3 billion on the
rail network and about $1 billion on locomotive, freight car and
equipment purchases.

“These are 20, 30, 40, 50-year assets,” BNSF CEO Matt Rose said in an interview at the meeting with Bloomberg
Television’s Betty Liu, who asked about spending. “It’s just a
long-term belief that the U.S. economy will continue to grow.
Population will drive that. And we want to make sure that we
have the physical plant to take advantage of it.”

MidAmerican said last month that it allocated $11.8 billion
for spending in the next three years on development and
maintenance capital expenditures. CEO Greg Abel formed a
renewable-energy unit last year to invest in wind and solar
projects and struck a deal with TransAlta Corp. (TA) to build
natural-gas power plants. The companies are bidding to develop
transmission lines to supply electricity to Canadian oil-sands
projects.

Berkshire Class A shares climbed 24 percent this year
through yesterday after rallying 17 percent in 2012.

Management Style

Buffett has told managers that they can communicate with
him as much or as little as they want about most matters, and
should contact him if they’re contemplating “unusually large
capital expenditures or acquisitions.” The billionaire has
quipped that he and Berkshire Vice Chairman Charles Munger
“delegate almost to the point of abdication.”

Buffett is a sounding board for CEOs of the operating
business, helping to hone and improve their ideas, said Eitan Wertheimer, whose family sold 80 percent of Iscar to Berkshire
in 2006 for $4 billion. Buffett’s firm said this month that it
reached a deal to buy the remainder for $2.05 billion.

“Warren’s not a manager,” Wertheimer said. “He’s a
teacher for all of us.”

Victor Mancinelli, who has expanded Berkshire’s farm-products company, CTB Inc., through acquisitions, said that he
typically approaches Buffett when an idea for a deal “picks up
steam.” The billionaire is usually able to grasp right away
whether a transaction makes sense, helping CTB act fast.

“He’s so quick and he understands business so well that
what could take hours or days for someone else” takes him
minutes, Mancinelli said. “When things come together just
correctly, we pounce.”

To contact the reporter on this story:
Noah Buhayar in New York at
nbuhayar@bloomberg.net

To contact the editor responsible for this story:
Dan Kraut at dkraut2@bloomberg.net.

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