How To Benefit From Buffett's $365 Million M&A Bet

Tuesday, September 9, 2014 - 5:45pm

by Eric Winter

It’s always important to keep an eye on where the big money is headed, namely Warren Buffett’s Bershire Hathaway, Inc. After all, Buffett is one of the wealthiest people on Earth.

Since the SEC requires institutional money managers who oversee more than $100 million to disclose certain transactions each quarter, following firms like Berkshire is made easy. And Buffett’s firm easily makes the mark, managing more than $180 billion.  That includes Berkshire’s record $55 billion in cash piling up in the bank, which my colleague David Sterman wrote about recently.

Berkshire’s 13F filing from the second quarter of 2014 is now available, and there are two big additions. See below for a quick glance at each.

That’s over $430 million worth of capital dumped into just two companies last quarter, which is quite the vote of confidence, even when you’re playing with billions.  

Looking a bit closer, however, we can see that the $66 million worth of DNOW was the product of a spin-off versus an outright purchase.  

The oil and gas parts distributor used to be a part of National Oilwell Varco, Inc. (NYSE: NOV) but was split-off at the start of summer.  The end-result simplified business models for both NOV and DNOW, with the former concentrating on manufacturing drilling equipment and DNOW focused on the supply chain.  

Berkshire has been an investor in NOV for two years now, starting with 2.8 million shares in Q2 2012.  The firm's position now sits at the 7.3 million share mark.  

Since the nature of the new DNOW position isn’t as “active” as I’d like, let’s focus on what prompted Berkshire to dump $365 million into Charter Communications, Inc. (Nasdaq: CHTR).  

As it turns out, there’s one huge reason why Charter found a home in Berkshire’s portfolio: an unprecedented handout of cable subscribers.

The blue chip telecom is the fourth largest cable operator in the United States -- sitting behind Comcast Corp., Time Warner Cable, Inc. and Cox Communications, ranked one through three, respectively.  

That ranking will shake up soon enough, however.  

After a number of failed attempts by Charter to buy its larger rival Time Warner, Comcast made an acquisition bid in February and TWC accepted.  In order to comply with anti-trust laws, Comcast/TWC will have to divest 1.4 million TWC subscribers to Charter once the merger is finalized, putting CHTR’s total subscribers at 5.7 million.

In effect, that move would push Charter past Cox, giving CHTR the number two spot behind the newly formed Comcast/TWC giant.    

Considering Berkshire’s investment in Charter came sometime in the second quarter, it’s likely that the fund reacted to this news and realized the potential value with the impending surge of new subscribers.  The traditional Buffett theme of buying at a discount is certainly in the works here.  

With his new position in CHTR, Buffett is joining the likes of fellow billionaire shareholders George Soros, David Shaw and Chase Coleman .  In fact, CHTR is the 11th most popular top-10 holding out of 775 funds surveyed, according to Goldman Sachs.  

I definitely see the potential value in holding CHTR through the merger and beyond.  With its wider subscriber base, Charter can better fend off competition and realize the accretive benefits of a merger it was bumped out of just a few months prior.   

Risks to consider:  First, this merger could fall through for a number of reasons, which would threaten Charter’s handout of subscribers. Second, let’s not forget that Warren Buffett and Charlie Munger aren’t the only two investment managers at Berkshire Hathaway.  Todd Combs and Ted Weschler came onboard in 2011 and their input should be expected to ever more prominent in new positions. While Buffett’s influence will likely be on every portfolio move, know that there are other sets of eyes hard at work as well.  

Action to take -->  It’s hard to argue with the thought process of “if it’s good enough for Warren Buffett, it’s good enough for me.”  Assuming the TWC/Comcast merger goes through, Charter Communications will see immediate value with the addition of the 1.4 million subscribers.  Long term, CHTR is in a mature industry, positioned to meet customer’s demands for faster connectivity and has a high chance of meeting its mean analyst price target of $177 -- prices currently stand around $156.

Berkshire, and more famously Warren Buffett, is known for its buy-and-hold strategy -- so anything Berkshire owns is a strong candidate for "Forever" stock status. These are companies that are so powerful, profitable and stable that you can literally buy them and hold them forever. To learn the name and ticker symbols of some Forever stocks, click here.

Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.