Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) reportedly recently sold vacuum cleaner company Kirby after 35 years of owning the enterprise.
Buffett first bought Kirby's parent, Scott Fetzer, in 1986. He ranked this business among Berkshire's top investments at the time and, at one point, it generated around 5% of group profits.
Berkshire acquires Scott Fetzer
Buffett first announced Berkshire's deal to acquire the business in his 1985 letter to investors (the deal was agreed in the first few months of 1986 before the letter was published.)
It was acquired for "about $320 million," and Buffett described it as "well-managed" and a "good earner."
The group's sales totaled $700 million at the time from 17 different businesses, including World Book Inc., which made up 40% of sales and "a bit more of its income."
In his 1986 letter, Buffett explained there were two primary reasons why he was attracted to Scott Fetzer in the first place. The primary reason was its World Book division and its encyclopedia that he regarded as "something special," as he had used it since he was a child.
The other attractive quality was Ralph Schey, its CEO. Writing about the CEO in 1986, Buffett said, "Ralph's operating and capital-allocation record is superb, and we are delighted to be associated with him."
Buffett's belief in the company's management certainly paid off. In 2002, the last year in which Berkshire broke out the division's earnings in its report, Scott Fetzer's net income was $83 million, the same figure as it reported for 2001. In these two years alone, the business earned back 52% of its purchase price.
Over the years, however, the company's management has moved on, and one of its flagship assets, the World Book business, has lost market share (mainly to the internet.)
Another deal
While Berkshire has yet to comment on the Kirby sale, it is interesting to note this is the second time in two years the conglomerate has disposed of a legacy holding.
Back in January of 2020, it agreed to sell the remainder of its newspaper and publication business to Lee Enterprises (LEE, Financial).
This deal was notable because it provided Berkshire with a way to get out of these businesses and still earn a return. It provided $576 million of long-term funding to Lee for the deal at an interest rate of 9%.
Before the Lee deal, the only other business sale Berkshire had completed since the 1980s was the divestment of one of its workers' compensation insurance companies, which it acquired 13 years before to eliminate conflicts of interest.
Commenting on the sale to Lee at the time, Buffett said via a statement:
"We had zero interest in selling the group to anyone else for one simple reason: We believe that Lee is best positioned to manage through the industry's challenges. No organization is more committed to serving the vital role of high-quality local news, however delivered, as Lee."
It could be the case that he believes the same is true with Kirby. The buyer is reportedly Right Lane Industries, a firm that's dedicated to buying and holding U.S.-based manufacturing businesses.
This seems to be a good home for this former division of Berkshire on the face of it.
There may also be a financial component to the deal. If Buffett has provided financing, he may have been able to achieve a better return on Berkshire's money than he would have otherwise been able to in the stock market or by holding on to Kirby.
This is all the speculation. We don't have any further information at this point, but I do not think it is unreasonable to assume the only reason Buffett decided to sell the business is that he found a good buyer at the right price.
