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Thursday Value Overview

Thursday’s edition notes the new Wesco (WSC) buyout price from Berkshire (BRK.A)(BRK.B), today’s oil plunge and its effect on Southwest (LUV), Delta (DAL), and United Continental (UAL), a link to a better airline, Allegiant (ALGT), more debt ceiling talk, and another look at a great Howard Marks article.

Berkshire issued a press release today announcing the final price and terms of the Wesco (WSC) takeover. The exchange ratio is 5.0611, meaning that five BRK.B shares will be issued for each Wesco share, with any remaining paid out in cash. The new value will be $385 per Wesco share, slightly down from the $387 per share announced in February. The vote will occur tomorrow. With Berkshire shares so cheap, this is a great deal for Wesco shareholders. Not quite so much for Berkshire shareholders. It would be much better for Berkshire to pay cash, but unfortunately the deal would not have gotten done that way.

The price of oil plunged today after members of the International Energy Agency, including the US, Japan and Germany said they would tap reserves. I wonder if there are any connections to yesterday’s comments from a Saudi prince about using the price of oil to pressure Iran.

Staying on Iran, it turns out five Russian nuclear scientists were killed on the Russian plane that went down earlier this week. They had all helped design the Iran project. While no foul play is suspected, a large number of connections to Iranian facilities have been killed under suspicious circumstances over the past few years.

What stocks will do well on this oil plunge? Traditionally airlines are beneficiaries so it should come as no surprise that Delta (DAL), Southwest (LUV) and United Continental (UAL) are flying high. My favorite airline is Allegiant (ALGT). I wrote a piece about them in February and the stock is up about 13% since then. Allegiant is less tied to oil prices because of their variable capacity model. If oil prices are high and it’s not profitable to fly, they’ll cut the number of flights. When it is profitable to fly, they increase the number of flights.

On politics, Vice President Biden and House Majority Leader Eric Cantor have been in negotiations about raising the debt limit. It appears that the time has come to call in the big guns. Cantor has pulled out saying that Speaker Boehner and President Obama need to finish the negotiations. That shouldn’t be much of a surprise considering Democrats don’t want to cut spending and Republicans don’t want to raise taxes. Personally, I think the only thing they’ll come to agreement on is a short-term extension. It’s hard to believe, but even the $2 trillion they’re bickering over is small potatoes when, following this trajectory, debt will reach $21 trillion by 2021. And, that’s the CBO saying that, and they always guess on the low side.

Great article from a few days ago from Distressed Debt Investing that is worth revisiting: My Favorite Takeaways from the Oaktree S-1. A few places to focus on: the explanations in the Business Principles section, the discussion on investing at the top of the capital structure, and the idea to be growing when others are shrinking. Howard Marks is as impressive as ever.

Disclosure: Long BRK.B

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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