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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Is Buffett's Graham Holdings Deal a Glimpse into Berkshire's Future?

Stocks in this article: BRK.B GHC

Updated from 10:50 a.m. ET to include closing share prices and calculations of Graham Holdings exchange

NEW YORK (TheStreet) -- Warren Buffett may be perfecting a new way for Berkshire Hathaway to exit its large investments. On Wednesday, Berkshire Hathaway (BRK.A) and Graham Holdings (GHC) agreed to a deal where the Warren Buffett-run company will acquire Miami TV station WPLG, cash and Graham Holdings shares in Berkshire Hathaway in exchange for Berkshire's 1.6 million share stake in the former owner of the Washington Post.

Berkshire Hathaway's deal essentially cashes out the investing conglomerate from its long-standing investment in Graham Holdings. But Berkshire won't sell a single share in the deal, even as it forks over about 21% of graham Holdings' stock.

Instead of selling shares on the open market, Berkshire will give its 1.6 million shares back to Graham for a TV station, cash and Berkshire shares that Graham Holdings acquired during a long-relationship between Buffett and the newspaper's founding family.

The Miami TV station will be valued at $364 million, and Graham Holdings will fork over $327.7 million and $400.3 million worth of Berkshire shares, as part of the deal, according to an 8-K filing with the Securities and Exchange Commission. Berkshire Hathaway will retain between 91,490 and 111,716 shares in Graham Holdings depending on the trading prices of both firms as the exchange closes.

For Berkshire Hathaway, the deal is more of an estate sale than anything. Buffett held onto a large chunk of Graham Holdings shares for decades amid the chronic decline in the newspaper industry, partly out of a relationship he had with the Graham family and particularly Katherine Graham. "I can afford to be sentimental," Buffett said of Berkshire's investment in Graham Holdings.

That sentiment, however, may have been lost when Graham Holdings sold The Washington Post to Amazon (AMZN) founder Jeff Bezos in 2013. What remains of Graham Holdings, formerly known as The Washington Post Company, is a conglomeration of educational businesses and broadcast TV channels.

If history is any guide, there may be tax savings in Buffett's share swap deal with Graham Holdings, over a sale of the company's stock.

For Graham Holdings, Monday's deal mostly amounts to a large stock buyback. Instead of Berkshire selling those shares on the open market, Graham will transfer assets such as WPLG, cash and Berkshire shares to Buffett.

Essentially Berkshire and Graham Holdings agreed to a swap, and not a sale.

Two things stand out. First, Buffett has now officially exited Berkshire's biggest newspaper investment, a stake often criticized by outside observers. There are few stock market "Oracles" still invested heavily in newspapers.

More importantly, however, Buffett's swap deal may be indicative of how Berkshire Hathaway could increasingly look to exit large investments.

Because Berkshire has so many large investments with unrealized gains, both Buffett and the company he invests in are in a slight bind if Berkshire wants to exit an investment. Large sellers of shares sometimes cause a company's stock to fall. There are also tax implications for Buffett.

Exchanges of company assets appear be an alternative way for Berkshire to exit its investments.

In December, Berkshire Hathaway exited its stake in Phillips 66 (PSX) by agreeing to a deal with the company for its Phillips Specialty Products unit, which optimizes the flow of oil and gas through pipelines. The deal may have underscored Buffett's willingness to invest in the logistics surrounding a surge in onshore oil and gas transport across the U.S.

It also amounted to a cash-rich spin-off for Phillips 66 and Berkshire Hathaway, according to Robert Willens, a tax expert.

Willens noted that the Phillips 66 deal was similar to Berkshire's divestment of White Mountains Insurance Group (WTM). In 2008, Berkshire divested an over 16% stake in White Mounts directly to the company in exchange for $751 million in cash plus two units of the Hamilton, Bermuda-based insurer.

Berkshire's Graham deal is similar to its White Mountain and Phillips 66 stake sales.

Whether Buffett's deal-making ways extend to Berkshire's larger investments like Wells Fargo (WFC), American Express (AXP), Coca-Cola (KO) and IBM (IBM) could be a story to watch in coming years.

"I am sure this is a mutually beneficial transaction for both companies," Buffett said of his Graham Holdings deal on Monday. "While this transaction will greatly reduce our position in Graham Holdings, our admiration for the company and its management is undiminished."

"Warren Buffett's 40-year association with our company has been extremely good for our shareholders. Naturally, the deal that we have put together is one that will be good for both companies," said Donald E. Graham, chairman and chief executive officer of Graham Holdings Company, said on Wednesday.

Graham Holdings gained over 3% in Wednesday trading, closing at $730.79. Berkshire Hathaway shares closed up less than 0.5% at $187,750.  -- Written by Antoine Gara

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!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

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