Business

Berkshire Hathaway to pay $12bn for US conglomerate Alleghany

March 21, 2022

Warren Buffett has dipped into Berkshire Hathaway’s $147bn cash pile for a $12bn deal to purchase Alleghany, an insurance to toy manufacturing conglomerate, ending an acquisition drought that had concerned Berkshire shareholders.

Omaha-based Berkshire, which owns a series of large insurers alongside other companies such as battery maker Duracell and minority stakes in businesses such as food group Kraft Heinz, said on Monday it would pay $848 per share for Alleghany.

Alleghany was founded almost 100 years ago as a railway company and at one point owned nearly a fifth of US track. Now, it owns a range of insurance and reinsurance companies as well as a toy producer, a funeral products maker, a hotel developer and a manufacturer of custom trailers. It produced profits of $1bn last year.

“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years,” Buffett said, adding that the group “has many similarities to Berkshire Hathaway”.

The price is a 29 per cent premium to Alleghany’s share price over the past 30 days and is a multiple of 1.26 times the company’s book value. With an equity value of $11.6bn, the takeover is Berkshire’s biggest in six years and will be paid for in cash.

Buffett has struggled in recent years to find companies worth adding to Berkshire’s portfolio and its record over the past decade has been a “mixed bag” filled with “integration issues [and] overpaying” for deals, said Cathy Seifert, an analyst at CFRA Research.

Berkshire’s last major takeover — the $37bn buyout of Precision Castparts in 2016 — resulted in a $9.8bn writedown. In the ensuing years, Berkshire mostly sat out a frenzy of dealmaking, choosing instead to buy tens of billions of dollars of its own stock.

“Buying an insurance company that looks a lot like Berkshire sounds like it could fit well,” said James Shanahan, an analyst at Edward Jones. “And perhaps Buffett needs a win.”

Bar chart of largest takeovers, including debt ($bn), showing Berkshire Hathaway's big M&A bets

A key area of Alleghany’s operations is property and casualty insurance and reinsurance, expanded under the leadership of chief executive Weston Hicks between 2004 and 2021.

Among the insurance companies in Berkshire’s portfolio are Geico, one of the largest car insurers in the US, and reinsurer Gen Re, which provides cover to primary insurers across life, health, property and casualty.

Alleghany’s chief executive Joseph Brandon joined from Gen Re in 2012. Buffett said he was delighted at the prospect of working again with his “longtime friend”.

The deal is expected to close in the fourth quarter. Under the terms of the agreement, Alleghany has 25 days during which it may seek other bids. It is a relatively rare concession from Berkshire, which is loath to engage in bidding wars.

Buffett wrote to shareholders in February saying that he and right-hand man Charlie Munger had found “little that excites us” as acquisition targets and warned that low interest rates had inflated the value of public companies.

That may have changed in recent weeks as the benchmark S&P 500 has fallen in value, with the shares of roughly a third of the companies in the index now down more than 20 per cent from recent highs. Shanahan said that alongside recent share purchases and more than $7bn spent buying stock in Occidental Petroleum, Buffett had found opportunities to spend.

“All of a sudden, it looks like Berkshire will put about $30bn to work in a year’s time,” Shanahan added.

Berkshire’s class A shares, which this month eclipsed $500,000 apiece for the first time, have climbed 16 per cent this year. The advance, including a 2 per cent gain on Monday in afternoon trading, has lifted the company’s valuation to $770bn. The S&P 500, by contrast, has fallen 7 per cent this year.