A lot of Warren Buffett (Trades, Portfolio) watchers have wondered when the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) chief would loosen up the purse strings and start spending the massive cash mountain that the company has built up over the last several years. That's not to say that the conglomerate has been completely inactive - it took a $500 million stake in gold miner Barrick Gold (GOLD, Financial) and data company Snowflake (SNOW, Financial), both of which are pretty unusual moves for Berkshire.
Buffett has on numerous occasions said that he doesn't like gold as an investment, and that he doesn't understand the tech sector enough to make good investment decisions in it. With that being said, it's entirely possible that neither Buffett nor his partner Charlie Munger (Trades, Portfolio) were behind these decisions - Berkshire's other managers enjoy a lot of autonomy, and have different opinions and competences to their bosses. Regardless, Berkshire's most recent investment - in TV station owner E.W. Scripps (SSP, Financial) - has Buffett's ideological fingerprints all over it. Here's how it was structured.
A sweetheart deal
Berkshire has committed $600 million to help finance a takeover deal that would see Scripps buy out broadcasting company ION Media to the tune of $2.65 billion. The investment nets Berkshire preferred shares of Scripps, as well as a warrant to purchase 23.1 million shares of the business, exercisable at $13 (shares of Scripps are currently trading at around $11).
The deal looks like a win-win for Buffett - either the merger goes well and Berkshire is able to exercise its warrant and pocket the free money, or it doesn't, in which case Scripps still has to pay Berkshire an 8% dividend on its preferred stock, which will rise to 9% if the TV station operator is not able to pay on time (which it would presumably pay by issuing more stock).
It can be difficult to get a good return in a near-zero interest rate environment, which Buffett obviously understands and has been able to use his enormous cash pile and clout to secure very favorable deals. When the markets crashed back in March and governments and central banks stepped in to backstop business, there was a lot of hand-wringing about whether Berkshire would ever be able to act as the lender of last resort again - why call sharks like Buffett and Munger who will try to negotiate as good a deal as possible, when Stephen Mnuchin and the U.S. Treasury will offer much better terms? This Scripps deal should allay at least some of those concerns.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett: The Value of Historical Data
- Retail Traders Rush Into Speculative Trading​
- The Value Investor's Handbook: Beware of Overly Specific Models
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