On Jan. 29, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) announced that it was selling its media interests to Lee Enterprises (LEE, Financial) for $140 million in cash.
This deal has attracted plenty of attention, not least because Berkshire's CEO and chairman Warren Buffett (Trades, Portfolio) has only given the green light on a handful of disposals over the past few decades.
The Oracle of Omaha has also said in the past, "our favorite holding period is forever." This sale implies that that is not the case.
The disposal raises some important questions. For example, if Buffett is happy to dispose of the struggling newspaper business, what other businesswa might he be willing to dispose of?
The disposal has made it clear that he is happy to offload businesses that are no longer generating attractive returns, and companies that are facing structural challenges. The asset sale also suggests that the Oracle of Omaha might be cleaning up his portfolio as part of his efforts to prepare the business for the next generation.
Buffett has been managing Berkshire since the early 1970s, and there's no one else who knows the business as he does. When he eventually leaves the business, the new manager or managers will have a huge task ahead of them to understand all the different parts of the Berkshire empire.
Sprawling business
Berkshire is a sprawling business. The group is made up of well-known, multi-billion dollar businesses such as Geico, BNSF and Berkshire Hathaway Energy. Still, there are also tens of smaller businesses such as Helzberg Diamonds, Pampered Chef, See's Candies and RC Willey Home Furnishings.
I am not saying that these are not high-quality businesses, or that they cannot function independently as part of the Berkshire group for many decades to come. But without Buffett overseeing everything, there is the potential that new managers will end up installing additional layers of bureaucracy as they try to get to grips with all of Berkshire's smaller subsidiaries.
Buffett says he has been working hard to ensure his mentality perseveres when he leaves, but we can never be sure.
Further asset sales
All of the above suggests that we might see additional asset sales in the near term. I don't want to double guess Buffett's actions, so I should state that this is only speculation at this stage.
Still, a couple of companies stand out to me as being right for divestment if Buffett is indeed trying to streamline the business.
For example, Berkshire's McLane business could be a prime divestment. While this is one of the largest divisions, its profits are tiny. In 2018, for example, the group reported pre-tax earnings of just $246 million, a profit margin of 0.18%.
Buffett seems to like McLane because it is a distribution business that provides services to thousands of convenience stores and supermarkets across the United States. This is a relatively sticky business model because these businesses are not going to change their suppliers overnight. Berkshire brought the company from Walmart (WMT, Financial) in 2003 as the retail giant wanted to streamline its operations.
McLane is the sort of operation Buffett likes to own. It has a definite competitive advantage and a steady stream of profits. However, if there's a question of whether or not the capital could be deployed better elsewhere, it's difficult to say no.
Overall, the disposal of the newspaper business could herald a change in Buffett's way of thinking. Holding so much cash while disposing of companies is a new side of Buffett we've not seen before.
It will be interesting to hear his thoughts on both of these topics at the annual meeting later this year. I'm certain he will face some interesting questions from shareholders in this unique business environment.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Seth Klarman: Opportunities for Value Investors Are Increasing
- Warren Buffett Decides to Get Out of the Newspaper Business
- Warren Buffett and the Circle of Competence
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