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Buffett’s Berkshire Buys More DaVita – Would It Buy the Whole Company?

July 09, 2013 | About:
Holly LaFon

Holly LaFon

279 followers
It’s currently unclear whether Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) wants only a major stake in DaVita (DVA) or it is incrementally swallowing it, but last week portfolio manager Ted Weschler tacked another 639,200 shares onto his existing position in the company. In a series of transactions costing approximately $65,608,000, the portfolio manager which Buffett hired in 2011 expanded Berkshire’s interest in DaVita to about 14.6%.

This is Weschler’s first purchase of the companys shares since the end of the first quarter of 2013, though he has been steadily acquiring shares since the third quarter of 2011. If Buffett wanted to buy the whole company, it would not be unlike many of his other recent transactions.

Correction: Per a May regulatory filing, Buffett and DaVita have entered into an agreement limiting Berkshire to 25% ownership of the company.

DaVita currently has a $12.35 billion market cap. Buffett spent more than twice that on railroad Burlington Northern Santa Fe, when he purchased it for $26 billion in 2009. He also spent $9.7 billion for fuel additives maker Lubrizol in 2011.

Buffett also made purchases of Burlington Northern shares before acquiring the whole company. He owned more than 20% of the company leading up to his announcement that he would buy the remainder at a 30% premium to its closing share price that day, paying with both cash and Berkshire shares.

However, he bought Lubrizol in its entirety for about $9 billion, representing a 24% premium to its share price, in an all-cash transaction. Berkshire has approximately $69.5 billion in cash on its balance sheet as of the end of the first quarter, an all-time high. Buffett has noted before that it is only the big purchases that “move the needle” at his massive conglomerate.

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The unprecedented cash hoard already takes into account the approximately $12 billion spent in a joint purchase of Heinz in February.

On the price side, Buffett was content to buy Heinz and Burlington Northern near all-time highs, and Lubrizol at an 18% premium to its highest-ever price. Previously, Weschler was buying DaVita shares at their peak price.

At Berkshire’s annual meeting in May 2013, Buffett commented:

We usually feel we’re paying too much, right Charlie? But find business so compelling that management or that so compelling that we gag and get there on price. But it is not mathematical formula. Looking back when we bought other businesses that we considered wonderful if we could have paid significantly more money and still would have been wonderful. So we never know 100%. Generally speaking, if we get a chance to buy a wonderful business, and by that we mean it has characteristics that lead you to believe it will return unusually high return on capital over time and better yet get to deploy more capital at decent rates of return, we probably should stretch a little.

But on July 2, when the most recent reported transactions began, the price had dropped 6% from the closing price the day before, and about 13% from their 2013 high reached in May.

Buffett has also said they prize owning large stakes in quality companies even when buying the entire company may not be feasible or desirable. The sudden price drop in DaVita could have influenced Weschler’s decision to add to his existing stake.

Buffett also commented at his shareholder meeting about business purchasing opportunities versus stock market opportunities:

“And we won’t find a lot of [good opportunities to buy businesses]. But in the stock market you will. The stock market will present you opportunities. In stock market auction markets crazy things will happen. A technical glitch can cause flash crash and doesn’t affect the biz at all. You will see opportunities in the stock market that you will never see in business market. But we really like buying businesses to hold and keep. We like buying stocks as well.”

DaVita may also be too expensive for Buffett to consider purchasing in full, if he could. At his shareholder meeting he objected to the suggestion that he pays fancier multiples for businesses than in the past, noting that he paid 20 times earnings for GE (GE), which was higher than he wanted. DaVita, by contrast, is trading for 27.4 times earnings, which is near an all-time high multiple.

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Though Berkshire cannot buy all of DaVita, Weschler is taking a major stake in the same kind of business Buffett is known for: a quality company that is simple to understand (dialysis for kidney patients) with strong free cash flow generation and growing earnings and revenue, as seen below:

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To see more of Buffett, Weschler and second portfolio manager Todd Combs’ stocks, go to the portfolio here.

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Rating: 3.6/5 (14 votes)

Comments

luishernadez
Luishernadez premium member - 1 year ago
I was just checking on DaVita's numbers, updating them after the acquisition of HealthCare Partners (and the name change of the company) and I estimate that the FY 2013 FCF will be around $815 million (that is after substracting the 16% share of the minority interest and assuming 4,5% interest rate and 35% income tax).

Therefore, at $115 a share ($12,1 billion mkt cap), the P/FCF is around 14,8x which doesn't look so bad, specially if the DaVita can grow its FCF/share at around 10%-15% over the next 5 to 10 years.

Any thoughts?

Luis Hernandez
vgm
Vgm - 1 year ago
The article asks: Will Berkshire buy the whole of DaVita?

I thought Berkshire had entered a standstill agreement with DaVita to limit purchase to a maximum of 25%.

http://www.reuters.com/article/2013/05/07/us-berkshire-davita-idUSBRE94614L20130507
rob24601
Rob24601 - 1 year ago
The 27.4 multiple is misleading for a couple of reasons. First, Davita set aside $300 million in Q1 2013 for a loss contingency reserve related to potential litigation settlements. This was a one-time charge to establish the reserve and won't occur in quarters going forward.

Second, the trailing twelve month EPS number doesn't include a full year of Healthcare Partners income. This would add a significant amount to DVA's bottom line. 2013 EPS is projected to come in around $7.51, so the PE ratio on that figure is more in the 15-16 range, and that's a more accurate estimate in my opinion. Or you could use a prof-forma of last year's DVA and Healthcare partners income statements to come at a more accurate number.

Sometimes there is more than meets the eye to a PE ratio and it helps to dive into the numbers. Another example currently is Express Scripts. The company appears to have a sky-high PE ratio, but when you adjust for a full year of the newly acquired company and calculate owner earnings (the number Buffett actually recommends, not cash flow or EBITDA), you get a much more accurate picture of the company's economic reality.
rob24601
Rob24601 - 1 year ago
Also, to VGM's comment a standstill agreement doesn't mean Berkshire can't purchase all of Davita, it just means they can't purchase >25% of the company on the open market and have to negotiate with management before acquiring a bigger stake in the company or acquiring it in full.

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