When it comes to jewelers, Warren Buffett likes to keep it in the family, patronizing Borsheim’s in Omaha, Nebraska, a Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) company. However, when it comes to seeking out investment gems, he’s not above working with an upscale competitor such as Tiffany (NYSE:TIF).
Berkshire Hathaway is lending $250 million to the New York jeweler, which has been buffeted by the downturn (pun intended). For Berkshire, the deal isn’t a big one, but it is emblematic of the “crisis investments” Buffett has made recently, in which he lends a hand to otherwise-solid companies that are experiencing temporary distress (at a price, of course).
Here is a list of private placements Buffett has been involved in over the past year, ranked by size:
|
Company |
Size/ Type/ Yield |
Equity Kicker |
|---|---|---|
|
Wm. Wrigley Jr. Company acquisition by Mars |
$4.4 billion in subordinated debt |
Berkshire simultaneously committed to buy a minority equity interest for $2.1 billion in the Wrigley Company subsidiary |
|
Goldman Sachs (NYSE:GS) |
$5 billion in preferred shares paying a 10% dividend |
Berkshire also receives warrants to purchase Goldman shares at a strike price of $115 |
|
General Electric (NYSE:GE) |
$3 billion in preferred shares paying a 10% dividend |
Berkshire also receives warrants to purchase GE shares at a strike price of $22.25 |
|
Dow Chemical (NYSE:DOW) |
$3 billion preferred shares paying 8.5% interest (contingent on completion of Rohm & Haas acquisition) |
Preferred shares are convertible into Dow Chemical common stock at a conversion price of $40/ share |
|
Swiss Re |
3 billion SFr* ($2.6 billion) in perpetual convertible notes paying 12% interest |
The notes can be converted into Swiss Re shares at SFr* 25 in three years’ time |
|
Vulcan Materials |
$400 million in two notes at an average yield of 10.28125% | |
|
Harley-Davidson (NYSE:HOG) |
$300 million in senior unsecured debt paying 15% interest | |
|
Sealed Air |
$150 million of senior unsecured notes paying 12% interest |
*Swiss francs.
Tiffany’s is an iconic brand, its name and pale blue boxes a symbol of New York sophistication around the world. In that respect, the Tiffany deal fits the mold of Buffett’s previous investments in companies with marquee brands, including Harley-Davidson and Goldman Sachs.
A liquidity issue, not a problem of solvency
The jeweler hasn’t been immune to the economic downturn -- net sales in November and December were off by nearly a fifth. Furthermore, the company was caught flat-footed in November when it tried to raise $300 million in debt just as the credit crisis worsened (it finally managed to put together $100 million in December).
However, a quick look at its balance sheet shows that the company’s finances are fundamentally sound (as of Oct. 31, 2008, total debt was just a third of the company’s total capital, with net debt equal to operating cash flow (EBITDA)). While less well-heeled jewelers Fortunoff and Whitehall have been forced to declare bankruptcy, there is absolutely no reason to believe that Tiffany’s will follow them.
Stock investors: Do your homework first!
With that said, Buffett-watchers shouldn’t jump into the stock purely on the back of this news. There is a big difference between owning a company’s debt and owning the common stock. With a multi-year distortion of biblical proportions in U.S. consumption, stock investors should take a hard look at Tiffany’s valuation in relation to its growth prospects. The firm is a jewel -- no question there -- just make sure you’re not paying Fifth Avenue prices for it.
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