The activist investor who urged Warren Buffett to vote against Coca-Cola's (NYSE: KO ) compensation plan is now speculating that Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) is conspiring to take the beverage giant private in a sweetheart deal. David Winters, CEO of Wintergreen Advisors LLC, which operates the Morningstar four-star-rated Wintergreen Fund (NASDAQMUTFUND: WGRNX ) , says Buffett's recent behavior suggests that he could team up with private equity firm 3G Capital to complete the deal. Is Winters crazy, or could Buffett shock the investing world with the largest leveraged buyout in history?
Where there's smoke, there's fire
Winters gave an interview with Maria Bartiromo to explain a letter he sent to Coca-Cola's board earlier this week. He explained how odd it is that Buffett, a stickler for reining in excessive compensation, was slow to speak out against Coca-Cola's excessive compensation package. Even when he did express displeasure with the plan, Buffett made a point to express his approval of management.
Winters says Buffett's comments at Berkshire's annual meeting provide further evidence that something is happening behind the scenes. At the meeting, Buffett held up the Heinz leveraged buyout, or LBO, by Berkshire and 3G Capital as the new model, suggesting that Buffett would like to do similar deals in the future. Winters also held up Buffett's remark that Berkshire "hasn't bought Coke yet" as another clue.
Buffett's and Coca-Cola's actions create a lot of smoke, Winters argues, and says, "Where there's smoke, there's fire."
Ordinarily, shareholders of an acquisition target should rejoice, not write angry letters to the board. However, Berkshire's 9% stake in Coca-Cola, Buffett's close relationship with management, and the presence of Buffett's son, Howard, on Coca-Cola's board make Winters concerned that shareholders could get a raw deal. "Coke should be full and fair auctioned, [with] maximum and full disclosure for all bidders around the world," Winters argued, not pre-negotiated behind the scenes.
Largest LBO in history
As soon as the buyout speculation reached her, CNBC's Becky Quick dialed Buffett to see if there was any truth to it. "Absolutely no chance of that," Buffett replied after asking her to repeat what seemed like an outrageous idea.
Of course, if Buffett said he had "no comment," it would only fuel speculation that the rumor was true, making the acquisition more expensive. Was Buffett forced to deceive the public in order to keep the target in play, or is the Coca-Cola acquisition as unlikely as it seems?
My bet is on the latter. Although Buffett is on the lookout for large companies to acquire, Coca-Cola may be too large. Berkshire's largest acquisition to date was its 2010 acquisition of Burlington Northern Santa Fe in a deal worth $44 billion including acquired debt. Coca-Cola's enterprise value is over $200 billion; even before a takeover premium, Coca-Cola would be Berkshire's largest acquisition by a factor of four.
Believers in the speculation might argue that the Heinz acquisition provides a blueprint that could make the Coca-Cola acquisition feasible. Berkshire and 3G used just $12.12 billion in cash to make an acquisition valued at $28 billion. If Berkshire and 3G pay a 15% premium to Coca-Cola's market capitalization, or $210 billion, plus assume $25 billion in net debt, the acquisition would be valued at $235 billion. Funding the deal with 40% cash would require $75 billion after subtracting Berkshire's existing 9.1% stake.
The biggest LBO of all time was valued at $55 billion. This means that Buffett and 3G would have to come up with more cash than the entire value of the largest LBO in history. Berkshire could conceivably come up with the cash, but it would have to dismantle its equity portfolio and insurance regulators may object.
What about other possibilities?
There are numerous other ways that Buffett could wrest control of Coca-Cola. Berkshire and 3G could make a tender offer for a large percentage of shares, Berkshire could gather a larger consortium of bidders that could take the company private, or Buffett could simply speak his mind and he'd be able to effect change at Coca-Cola.
Investors looking to make a quick buck should know that none of these scenarios is likely to ever happen. Buffett is not one to meddle in the affairs of his investments, whether wholly owned subsidiaries or publicly traded stocks. If he thought Coca-Cola's management couldn't deliver for shareholders, Buffett would not own the stock.
Foolish final thoughts
If Buffett was ever considering a buyout of Coca-Cola, I doubt he still is now. Not only would the acquisition be enormous, but it would tarnish Buffett's reputation as an honest and transparent businessman. David Winters' wild speculation keeps him in the news, possibly boosting investor interest in his mutual funds, but investors would be wise to ignore the speculation. There's no fire here, just a mutual fund manager blowing smoke.
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