Berkshire Hathaway’s annual report attracts a great deal of attention primarily because it includes Warren Buffett’s letter to shareholders. Diligent reporters and investors often read the annual report itself but it is not common for Berkshire’s 10-K filing to attract much attention. Even less attention is devoted to the 10-Ks filed by certain Berkshire subsidiaries including Berkshire Hathaway Energy (BHE). Usually reading the subsidiary reports isn’t necessary but occasionally insights can be gleaned from relatively minor details.
Valuation Indicators from Repurchase Transaction
The following minor note appears in BHE’s 10-K filing:
On February 17, 2015, BHE repurchased from certain family interests of Mr. Walter Scott, Jr. 75,000 shares of its common stock for $36 million.
Walter Scott and Warren Buffett are lifelong friends. Mr. Scott has been a director of Berkshire Hathaway since 1988 and a significant minority shareholder of BHE (formerly MidAmerican Energy) since Berkshire acquired control of the company in 2000. As of January 31, 2016, Mr. Scott owned 9.1 percent of BHE shares outstanding. Additionally, Mr. Scott owns 100 Class A shares of Berkshire Hathaway.
Mr. Scott (and related entities) have certain rights to put their common shares back to BHE at “fair value”:
On March 14, 2000, and as amended on December 7, 2005, BHE’s shareholders entered into a Shareholder Agreement that provides specific rights to certain shareholders. One of these rights allows certain shareholders the ability to put their common shares back to BHE at the then current fair value dependent on certain circumstances controlled by BHE.
It is likely that the $36 million repurchase was made in response to exercising this put option. The implied per-share valuation for the repurchase of 75,000 shares is $480.
According to the 10-K, BHE had 77,391,144 shares outstanding as of January 31, 2016. Although the repurchase was made over a year ago and the value of BHE might be more than $480 per share today, if we use the $480 per-share figure as a value proxy, we can infer a total valuation for BHE common equity of $37.1 billion.
BHE’s 10-K indicates that shareholders’ equity was $22.4 billion as of December 31, 2015. Of this amount, goodwill accounted for $9.1 billion indicating tangible equity of $13.3 billion. If we take the repurchase valuation of $37.1 billion as a proxy for BHE’s market value today, this implies a valuation of 1.66x book value and 2.79x tangible book value.
Conclusion
Warren Buffett and Walter Scott have been friends since childhood and have maintained extensive business ties for several decades. These ties were deepened considerably when Berkshire Hathaway acquired control of BHE sixteen years ago. Warren Buffett made the following comment regarding Mr. Scott in the 2007 Berkshire Hathaway annual report:
Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave Sokol and Greg Abel. It’s unimportant how many votes each party has; we make major moves only when we are unanimous in thinking them wise. Eight years of working with Dave, Greg and Walter have underscored my original belief: Berkshire couldn’t have better partners.
Based on the relationship between Mr. Buffett and Mr. Scott, it is not plausible to think that the valuation assigned to the repurchase would be too far from fair market value. As a result, we can consider $37 billion to be an approximate indicator of what Mr. Buffett thought BHE was worth in February 2015. This valuation exceeds the carrying value of BHE on Berkshire Hathaway’s books providing additional evidence that Berkshire’s intrinsic value far exceeds book value.
Obviously, it would be a good idea to confirm the valuation of the repurchase with a fundamental analysis of BHE itself. However, the purpose of this post is simply to make note of an interesting piece of information from BHE’s 10-K filing that sheds light on the valuation of the company from the perspective of insiders.
Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.