Warren Buffett’s Berkshire Hathaway Inc. said it would buy aerospace parts maker Precision Castparts Corp. in a $37.2 billion deal, its biggest ever, taking it out of the market for another big acquisition for now.
The deal, which eclipses Berkshire’s $26.5 billion purchase of Burlington Northern Santa Fe railroad in 2010, extends Buffett’s push into the industrial and aerospace sectors.
“This takes us out of the market for an ‘elephant’ for 12 months or so... but we will be buying a few small things in the next six months,” Buffett said on CNBC.
Berkshire’s offer of $235 per share is a premium of 21.2 per cent to Precision Castparts’ Friday close of $193.88.
The company’s shares were trading at $230.85 before the bell yesterday.
“Although the takeout price looks a little low to us, we doubt if PCP’s shareholders will say no to Warren Buffett, especially given the year-to-date performance in a tough equity market,” RBC Capital Markets analyst Robert Stallard wrote.
The deal, which has an equity value of about $32 billion, is pitched at about 18 times Precision Castparts’ forward 12-month earnings per share, according to Thomson Reuters data.
“In terms of price-earnings multiple going in, this is right there at the top,” Buffett said.
Berkshire was already one of Precision Castparts’ largest shareholders, with a stake of about three per cent as of March 31, according to regulatory filings.
Precision Castparts gets about 70 per cent of its sales from the aerospace industry, which has experienced booming demand for commercial aircraft, leading Airbus Group and Boeing Co. to boost production.
Precision Castparts also makes energy production equipment.
“When you get a chance to buy a wonderful company, there is usually some reason why you are getting that chance and perhaps a slump in oil and gas helps us in this case,” Buffett said.
Global oil prices have more than halved since June last year.
Buffett said Berkshire would use about $23 billion of its own cash and borrow the rest to finance the deal. “We will have about $40 billion in cash once we get through this,” Buffett said. “I like to have a lot of cash at all times.”
Up to Friday’s close, Precision Castparts’ shares had fallen about 15 per cent in the past 12 months, underperforming an eight per cent rise in the S&P 500 index.
Credit Suisse was financial adviser to Precision Castparts, while Cravath, Swaine & Moore LLP and Stoel Rives LLP were legal advisers. Berkshire Hathaway’s legal counsel was Munger, Tolles & Olson LLP.