The Strategist

Warren Buffett Outlines a Record High

08/10/2015 - 15:49

Berkshire Hathaway is close to signing an agreement to purchase the US steel corporation Precision Castparts, whose main customers are Airbus and Boeing. The transaction amount is estimated at $ 30 billion, which will be the largest absorption not only for Warren Buffett's holding company, but for the entire aerospace industry as well.

thetaxhaven via flickr
thetaxhaven via flickr
Conglomerate Berkshire Hathaway is preparing a deal to takeover the US steel corporation Precision Castparts, supplying smelted parts for the defense, oil and gas and energy companies. Most of the revenue the company gets from the work in the aerospace industry, where the main customers are Airbus Group and Boeing Co. According to The Wall Street Journal, citing its own sources, Warren Buffett's holding company intends to sign an agreement with the manufacturer in the current week.
The market capitalization of Precision Castparts on the results of Friday's trading is about $ 27 billion. Given that the contract sale price probably will include the award, the estimated amount of the transaction could reach approximately $ 30 billion. In this case, this absorption may become the largest for Berkshire Hathaway, and for the entire aerospace industry. Until now, the most important acquisition of billionaire Warren Buffett was buying a 77% stake in the American railroad operator Burlington Northern Santa Fe Corp., costing at $ 26.3 billion. In 2013, the holding had acquired HJ Heinz company for $ 23 billion, which later announced a merger with the Kraft products manufacturer.
Berkshire Hathaway needs constant acquisitions, in order to maintain sufficient revenue. Warren Buffett has long talked about the intention to make a big deal, but every time, he said, he was stopped by the lack of suitable targets for the uptake at affordable prices. At the end of the last quarter, revenues of the holding has fallen by 37%, and it looks like the time has come to make a decision about the purchase. Aerospace and Precision Castparts can be a valuable asset in the portfolio of Berkshire: in recent years, airlines have increased their appetites seriously, updating its own fleet with more economical in fuel consumption ships. As a result, Airbus and Boeing have accumulated orders for 10 thousand aircraft during this time, which, in turn, provided the demand for Precision.  

Last year, the steel corporation’s revenues was about $ 10 billion, with 70% of this amount generated by orders for the aerospace industry. However, increased airlines’ demands to suppliers have forced last actively invest in building production capacity, which adversely affects the final reporting. This, as well as problems in the energy sector, have led to a deterioration in Precision Castparts’s financial performance: net profit for the last quarter fell by 17.4%. If we look at the figures for last year, we can see revenue growth of only 5% compared with 14% in 2013, and the first for the last five years, the fall in net profit. At the end of 2014, it fell by 14% to $ 1.5 billion.