What’s Warren Buffett up to in Europe?
Berkshire is looking to take advantage of cheaper borrowing costs for long-dated euro notes.
Warren Buffett’s Berkshire Hathaway Inc. is selling debt in Europe. For those of us on the Buffett M&A watch, the move certainly raises an eyebrow.
Berkshire has hired banks to manage a benchmark sale of 20- and 30-year bonds in euros, as well as in pounds, Bloomberg News reported Tuesday, citing a person familiar with the matter. It would be the Omaha, Nebraska-based company’s first euro-denominated bond deal since 2017 and the first time it’s ever sold debt in pounds.
Berkshire would be joining a trend of US companies, such as Deere & Co., looking to take advantage of cheaper borrowing costs for long-dated euro notes. But in the case of Berkshire, the debt sale also stirs up speculation about whether Buffett is moving closer toward making an acquisition in Europe, something he’s wanted to do for a while.
At last month’s Berkshire Hathaway shareholder meeting, Buffett hinted that a lengthy interview he recently gave to the London-based Financial Times was partly a strategic move to raise his company’s profile overseas:
I would like to see Berkshire Hathaway better known in both the UK and Europe, and the FT audience was an audience that I hoped would think of Berkshire more often in terms of when businesses are for sale.
Buffett, 88, has long enjoyed preferential treatment in the US mergers and acquisition market, as sellers have typically called him up to pitch their companies and name their price, rather than Berkshire having to pursue them. Despite his worldwide celebrity, he hasn’t been able to create the same dynamics in Europe, though. During last month's meeting, Morningstar analyst Gregg Warren asked Buffett whether it's because Berkshire is still so US-centric that perhaps would-be sellers in Europe “are unaware of your willingness to step up and buy them outright and allow them to run their companies under the Berkshire umbrella.” Buffett said the bigger challenge is finding a target large enough to move the needle at Berkshire, a $507 billion company.
Valuations for US takeover targets have been elevated for some time, as more acquirers compete for deals because of their own tepid growth prospects. That’s kept Buffett on the sidelines, unwilling to risk overpaying. However, in Europe and the UK, uncertainty surrounding Brexit and a generally weaker economic outlook has left stocks there trading at a discount to those in the US Buffett also said he’s hoping for a deal in the UK or Europe regardless of the Brexit outcome. The relatively cheaper stocks and favorable borrowing environment create an opportunity for a dealmaker with global ambitions just itching to strike. Berkshire also had $114 billion of cash as of March.
It’s hard to know what Berkshire’s motivations are for its upcoming debt sale. That said, the company is unlikely to want to swap the proceeds from the euro and sterling corporate bonds back into dollars because there is no specific arbitrage benefit. It is simply super-cheap funding that makes sense to keep in the currency of issuance.
Berkshire also has chosen a particular sweet spot for its inaugural sterling bond in an ultra-long maturity as the UK yield curve is inverted beyond 25 years. That means the company can keep its overall sterling issuance cost to around 2 per cent, given that the 40-year UK government bond yield is just 1.35 per cent. Similarly, Berkshire’s overall cost for 20- to 30-year euro-denominated maturities will be less than 1.5 per cent, making it substantially cheaper than raising in US dollars.
If the Oracle of Omaha does have M&A on his mind, what could he buy? That’s the multi-billion-dollar question. Even though Buffett has always maintained a set of clearly defined takeover criteria, guessing his next deal has never been easy in the US, never mind in Europe, where his goals aren’t so clear. UK utilities, battered by fears they may be taken over by the state if the opposition Labor party were to gain power, may be one area for Buffett to scope out. Berkshire already owns Northern Electric Finance Plc, which also recently issued sterling-dominated debt maturing in 2049.
Using the Bloomberg terminal, we adjusted a screening intended to track potential US Berkshire takeover candidates so that it instead filters for European companies, specifically those with market values of $5 billion to $50 billion (4.4 billion to 44 billion euros). Among the names that come up are Atlas Copco AB, a Swedish maker of industrial tools; Metso Oyj, a Finnish mining equipment manufacturer; Mondi Plc, an Austrian packaging and paper company; and Ryanair Holdings Plc, an Irish budget airline. Beyond their financial metrics, not all the companies necessarily fit the bill, and many have big caveats – it's certainly hard to picture Buffett donning a Burberry trench coat, for example. But it's always interesting to see what companies seem to possess the hallmarks of a Buffett target, on paper at least:
If Buffett’s plan is to go shopping in Europe, step one may have been the newspaper interview, and step two, the bond sale. Step three? Wait for his phone to ring 4,000 miles away.