Over the last five decades, Warren Buffett has transformed the once-ailing textile company Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) into the greatest collection of corporations the world has ever seen. "Berkshire now owns eight and a half companies that, were they stand-alone businesses, would be in the Fortune 500," Buffett reported in his latest letter to shareholders.
But even though the Omaha, Neb.-based billionaire is continuing to grow his empire, completing two multi-billion dollar deals in 2013 alone, it is inevitable that Berkshire will someday reverse course and unleash the greatest spin-off investment bonanza the world has ever seen.
Why realignment is inevitable
Although it's impossible to predict the timing of this change, it's safe to assume that it won't come about anytime soon thanks to the size of Buffett's stake in Berkshire and the plan for the disposition of his shares.
At the end of Buffet's governance, about 80% of his net worth, which is currently around $67 billion, will be bequeathed to the Bill and Melinda Gates Foundation. By doing this, Buffett effectively keeps Berkshire in a "lock-box" due to his 34.4% voting interest in the company.
Moreover, the board of directors and executive officers retain an additional 4.1%. Bill Gates alone owns 6.8% of Berkshire's class B shares.
Gates, a longtime personal friend, bridge-playing partner of Buffett, and Berkshire board member can be counted on to maintain Buffett's present corporate policies. And presumably so can Buffett's son Howard, who's already been selected to serve as the next board chairman.
But this unity won't last forever. Years from now, pressure on Gates and the board will mount as the lure of more than $1 trillion in market capitalization and the gigantic spin-off of operating corporations will prove irresistible.
Warren Buffett and 3G Capital
Two of Buffett's latest deals lend themselves particularly well to a future realignment in which Berkshire's shareholders receive the proceeds from the greatest spin-off investment bonanza in history.
Last year, Berkshire Hathaway and partner 3G Capital bought H.J. Heinz for $23 billion. Berkshire has a 50% interest in the ketchup maker, and could eventually own 100%. At the most recent Berkshire annual meeting, Buffett lavished praise on the Brazilian investment firm calling them great managing partners.
And last month, in partnership with 3G Capital once again, Berkshire helped finance Burger King's $11.4 billion takeover of the Canadian restaurant chain, Tim Hortons. It did so by purchasing $3 billion of preferred shares in the new company which will pay an annual dividend of 9%.
Tim Hortons has 3,588 restaurants in Canada and 859 in the United States; Burger King has around 14,000 outlets in 91 countries. Moreover, the Hortons-Burger King combination offers the appeal of a tax inversion to be headquartered in Canada which has a corporate tax rate roughly 10% lower than that of the United States.
Upon Berkshire's realignment, these two deals alone could spawn upwards of 50 independent companies. Heinz will be able to spin off over 10 of its corporations to shareholders, and I envision Hortons, along with Burger King, following suit with over 40 separate entities.
The coming spinoff bonanza
Officially, Berkshire exercises direct control over 57 subsidies acquired over the last five decades. Unofficially, however, the coming spinoff bonanza could yield well over 200 separate businesses, as many of Berkshire's subsidiaries lend themselves to spinoffs of spinoffs.
This is why I believe every young and middle-age investor should have a significant amount of Berkshire shares in their investment portfolio. It's going to take about 15 years, but it's inevitable that someday Berkshire will spin off all of its operating corporations to shareholders on a tax-free basis and, in doing so, triple the value of shareholders' current stakes.