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Berkshire Builds With Clayton

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By LouAnn Lofton (TMF Bling)
April 2, 2003

Warren Buffett has brought another company into the Berkshire Hathaway (NYSE: BRK.A) fold. This time, the lucky one is Knoxville, Tenn.-based manufactured housing firm Clayton Homes (NYSE: CMH).

From the looks of it, it's yet another classic Buffett move to scoop up an industry-leading company when the time and price are right.

Clayton's been around since 1966 and handles all aspects of the manufactured home business. It builds them, sells them, finances them, insures them, and even creates communities for them. Want to buy a trailer or live in a trailer park? Clayton can hook you up. (Make mine a doublewide, please.)

Clayton's financing arm is a real strength, accounting for about 27% of revenues and a substantial chunk of operating income. As other players in this industry -- most notably Oakwood Homes -- have been felled by their bad financing practices, Clayton has remained strong.

Buffett's shown interest here before, providing $215 million in financing for Oakwood to help it emerge from bankruptcy. With Clayton, though, Berkshire gets a solid company that has weathered the industry's downturn quite well. Of course, in true Buffett fashion, he has no desire to impede on Clayton's operations, so the company will continue to operate out of Knoxville.

If this were another company and a different acquisition, we'd probably wonder if the price was right. However, this is Buffett we're talking about. He offered Clayton shareholders $12.50 in cash per share, a 13% premium over Tuesday's close. The deals' worth $1.7 billion, all told. Founder James Clayton and a family foundation own 28% of the company's stock and will vote in favor of the merger.

Thanks to Fool Community member Goofyhoofy, we know the story behind the purchase, which is another classic Buffett aspect of this transaction. According to an article in the Knoxville News Sentinel, a University of Tennessee finance professor gave Buffett a copy of James Clayton's self-published autobiography as a gift. Two weeks after getting the book, Buffett was on the phone with Kevin Clayton, CEO (and James's son). It took Buffett only three calls to express his interest in buying Clayton, and a mere two weeks after that first phone call, the deal was in place.

James Clayton was out of town during some of the talks, and not wanting Buffett's name to be floated around the company's open-air headquarters, he suggested a code name for him: "Mr. Sunshine." Indeed, he is.

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