With Burlington Northern Santa Fe still ringing in the backs of investors' minds, Berkshire Hathaway (NYSE: BRK-B) last Thursday put $12 billion to work in a joint arrangement with 3G Capital to acquire ketchup king H.J. Heinz (HNZ +0.00%). The deal, which represents the largest ever takeover in the food industry, sent shares of Heinz up 20% and valued the company's equity at a whopping $23 billion.
Perhaps the sheer size of the buy is to blame, but the news surprised investors around the world despite Berkshire CEO Warren Buffett's repeated assertions that he was just itching to put some of Berkshire's $47 billion in cash to work. Even now, shortly after the announcement, Buffett told CNBC, "I'm ready for another elephant. Please, if you see any walking by, just call me."
To be sure, after the Heinz deal is complete, Berkshire will have around $35 billion left in its coffers. Since Buffett likes to keep around $20 billion in reserves on the books, that leaves $15 billion available for new acquisitions going forward.
Two guns, one for each of you...
With that much cash, Berkshire could be working as we speak to acquire another fairly large company outright. However, yesterday's news shows even larger companies could be fair game depending on the partners involved. In addition, as Buffett commented last week, "Of course, the cash builds from month to month, so the gun is always getting reloaded."
So the question is when, not if, Berkshire once again surprises the world with another huge acquisition. Here are a few companies, then, that could be at the top of its "to buy" list right now.
Dialing in on dialysis
While Buffett was busy putting the finishing touches on the Heinz acquisition, it turns out Berkshire was also increasing its stake in kidney disease specialist DaVita (DVA 0.15%). According to recent SEC filings, after adding nearly 180,000 shares in the fourth quarter, Berkshire now owns around 15% of the well-regarded health care firm, up from a less than 3% stake at the end of 2011, and making DaVita one of Berkshire's 12 largest positions. Given DaVita's current market capitalization of $11.1 billion, Berkshire has more than enough cash to buy the remaining $9.5 billion in shares it doesn't already own.
So why would Berkshire care to own DaVita? To be sure, as a medical operating company, it seems well outside Buffett's typical comfort zone. However, the fact that Berkshire doesn't currently own any businesses in the medical industry could be a great excuse to further expand its reach. In addition, thanks to DaVita's $4.4 billion acquisition last year of HealthCare Partners, the company has moved to diversify operations from its previous laser focus on kidney disease and now manages 152 general health care clinics, 700 staff physicians, and a network of more than 8,300 independent doctors.
At first glance, DaVita's trailing P/E ratio at just above 21 looks a little rich for Uncle Warren's taste. Also, given the relatively small size of Berkshire's position, it was likely the handywork of one of Berkshire's younger portfolio managers like Ted Weschler or Todd Combs. Buffett, then, could still need some convincing that DaVita would be a good fit with the rest of Berkshire's businesses. Even still, DaVita's forward P/E of 13.5 looks much more palatable since analysts expect it to continue growing quickly -- a fair assumption considering it has grown earnings at a 15.4% clip for the past decade. Additionally, if Berkshire owned DaVita outright, Buffett would undoubtedly keep existing management in place while encouraging them to continue business as usual, which would be a great thing considering DaVita has been named as one of Fortune's most admired health care companies for the past seven years in a row.
To reload the gun more quickly
If there's one thing Warren Buffett is great at, it's investing Berkshire's insurance float and shareholder equity to create enormous long-term value for investors. If Berkshire is going to make another large acquisition, then why not another insurer whose float could give him that much more money to invest?
Allstate (ALL +1.20%), for one, turned in $33.3 billion in revenue while generating more than $3 billion in operating cash flow in 2012. In addition, Allstate currently trades at under 10 times trailing earnings and 9 times forward estimates with an EBITDA multiple of just 6.1. Of course, considering the size of both Allstate and Berkshire's GEICO, it would be no easy task to combine the two entities and form the largest auto insurance company in the United States. As a result, there would likely be hairy regulatory hurdles to clear in order to make such a deal happen. Even so, however remote the chances, and if those obstacles could be overcome, an Allstate acquisition would effectively make Berkshire's huge moat in insurance even wider than it already is.
Agreeing on agriculture
Warren Buffett is often known to use farming analogies to describe investing techniques. To be sure, as a sophomore in high school, Buffett once showed his early entrepreneurial spirit when he bought a 40-acre farm in Nebraska and hired tenant farmer to run the operation. In addition, Buffett also bought a farm in 1977 for his son Howard (charging him rent, of course) who, in addition to his philanthropic efforts, has been farming in Nebraska ever since.
That's why I wouldn't be surprised if Berkshire eventually made a play to acquire a steady agriculture giant such as $22 billion corn processing king Archer Daniels Midland (ADM 2.48%) or even $35 billion heavy equipment specialist Deere & Company (DE +1.07%). On one hand, similar to DaVita, Berkshire currently owns small stakes in both Archer Daniels and Deere, which were likely bought by Combs or Weschler. On the other hand, unlike DaVita and considering Buffett's long-standing appreciation for the industry, both Archer Daniels and Deere would have little trouble fitting in with the rest of Berkshire's businesses including agricultural systems specialist CTB.
Prepare yourself
The fact remains Berkshire is one of the world's most powerful companies, and Warren Buffett is working hard to ensure it stays that way long after he's gone. In any case, don't be surprised when Berkshire announces its next huge deal. In the end, whether you choose to buy shares of Berkshire or one of the other aforementioned companies, I'm betting you'll be more than satisfied with the results over the long run.
