This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Buffett's Berkshire Plays Both Sides of Phillips 66 Breakup

Stocks in this article: PSXBRK.ABRK.B

Updated from 9:23 a.m. ET with Robert Willens comment, opening share prices and additional information throughout

NEW YORK (TheStreet) -- Warren Buffett's Berkshire Hathaway (BRK.A) is buying part of Phillips 66 (PSX) with part of Phillips 66.

Yes, folks that's not a typo.

The Oracle of Omaha is using a piece of his over 4.5% holding in Phillips 66 shares to buy the company's Phillips Specialty Products unit, which optimizes the flow of oil and gas through pipelines. For Buffett, the deal appears to be another bet on the logistics surrounding a surge in onshore oil and gas drilling across the U.S.

Berkshire's biggest-ever acquisition, its over $30 billion takeover of railroad Burlington Northern Santa Fe, also is profiting from an energy boom within the continental United States. BNSF railcars have been among the biggest transporters of oil and gas in the U.S. given the still-limited pipeline access to many promising shale basins. At Berkshire's annual shareholder meeting, Buffett said Berkshire Hathaway has been lucky that so much oil has been found near BNSF track.

Buying Phillips Specialty Products Inc. (PSPI) is another oil transportation bet, but this time with pipelines. The business appears to concentrate on improving the performance of existing pipelines, obviously with the end-goal of increasing transport.

What is most interesting in the deal, announced after the market close on Monday, however, is how Buffett will be acquiring PSPI from Phillips 66.

Instead of dipping into Berkshire Hathaway's war-chest of cash, the insurance conglomerate will simply be handing over approximately 19 million of its shares in Phillips 66, worth about $1.4 billion as of Monday's close. At current share prices, that also amounts to about 70% of Berkshire's 4.53% stake in the midstream energy giant.

"In exchange for the share capital of the wholly owned subsidiary, Phillips 66 will receive shares of Phillips 66 common stock currently held by Berkshire Hathaway. The specific number of shares will be determined by the share price at deal closing," Phillips 66 said in a press release announcing the deal.

"I have long been impressed by the strength of the Phillips 66 business portfolio," Warren E. Buffett, said of the deal. "The flow improver business is a high-quality business with consistently strong financial performance, and it will fit well within Berkshire Hathaway," he added. Berkshire plans to have James L. Hambrick, CEO of Lubrizol oversee the unit's strategic direction.

Mario Gabelli, head of Gabelli Funds said on Twitter that the financial terms of Berkshire's PSPI acquisition from Phillips 66 will look like a so-called cash rich spin-off.

Because Berkshire will be forking over its shares for PSPI instead of selling them on the open market, it may minimize taxable capital gains on the firm's Phillips 66 holding. Phillips 66 may also garner a tax benefit from the deal because it will effectively retire stock using PSPI's pre-tax value.

Phillips 66 said the PSPI business will have about $450 million in cash and cash equivalents on its balance sheet at the close of Berkshire's acquisition, which is expected in the first half of 2014.

Wells Fargo analyst Roger D. Read said Phillips 66's entire specialty division generates about $250 million in annual earnings before interest, taxes, depreciation and amortization (EBITDA), with PSPI generating just a portion of those earnings. Read estimates that the specialty unit will generate just 4% of Phillips 66's 2014 EBITDA and that PSPI was sold a premium price relative to the firm's valuation.

Furthermore, Buffett and Berkshire appear able to afford a premium priced PSPI acquisition using Phillips 66 shares. Berkshire Hathaway marked the cost of its Phillips 66 shares at $660 million in its 2012 shareholder letter. Meanwhile, the stock-for-PSPI swap will come with tax advantages for Berkshire Hathaway.

"Berkshire Hathaway made a strong offer for our high-performing flow improver business," Greg Garland, Chairman and CEO of Phillips 66, said in a press release.

The cash-rich split "is a way for a holder of appreciated stock to dispose of it in a very tax efficient way," Robert Willens, an independent tax expert, said of the deal in a Tuesday telephone interview. He called the PSPI acquisition a "great transaction" for Berkshire Hathaway.

"The distribution of PSPI to BRK is intended, no doubt, to qualify under Sec. 355 of the Internal Revenue Code. If its does, neither PSX nor BRK will recognize gain on the exchange of the stock of PSPI for BRK's PSX stock," Willens wrote in a client note. 

Still, one wonders whether shareholders might have wanted cash or ownership of PSPI and not what amounts to a stock buyback for the specialty pipeline business. One also wonders whether Phillips 66's sale of its PSPI unit to a large shareholder raises conflicts of interest.

That's especially the case since Berkshire will be paring its stake in Phillips 66 significantly through the PSPI acquisition. A press release announcing the deal and an 8-k filing with the Securities and Exchange Commission also don't list any advisors on the stock transaction.

Willens, the tax expert, said "it makes you wonder why the unit was only offered to the one shareholder rather than all of Phillips 66 shareholders." He also noted that Berkshire Hathaway has pursued similar deals in the past, notably, its dealings in White Mountains Insurance Group (WTM). In 2008, Berkshire divested an over 16% stake in White Mountains directly to the company in exchange for $751 million in cash plus two units of the Hamilton, Bermuda-based insurer.

John Malone of Liberty Media (LMCA) has also used cash-rich spinoffs to acquire interests in businesses such as the Atlanta Braves and DirecTV (DTV), Willens said.

TheStreet has reached out to Phillips 66 and Berkshire Hathaway to get clarity on whether either firm perceived any conflicts and, if so, worked to mitigate them as the transaction materialized.

Phillips 66 shares were rising over 2% in early Tuesday trading to $76.57. Shares in the company have gained over 40% year-to-date and have more than doubled since the company was split off from ConocoPhillips (COP) in 2012. Berkshire has been a long-time investor in ConocoPhillips, possibly helping its Phillips 66 holding qualify for Monday's cash-rich spinoff.

-- Written by Antoine Gara in New York

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs