Monday, July 6, 2020

Smart Money Moves - Warren Buffett

Berkshire Energy announced a $9.7 billion deal to acquire the natural gas pipeline and storage facility business of Dominion.  It is being interpreted  as a vote of confidence for the economy by Warren Buffett.  Nothing could be further from the truth.

First of all, the deal involves $4 billion in cash and the assumption of $5.7 billion in debt.  That’s a tiny investment for Berkshire Hathaway which had accumulated $137 billion in cash at the end of 1Q20 (the deal “consumes” just 2.9% of the cash hoard).

Secondly, the gas pipeline business is a highly regulated utility that produces stable annual returns, a very good alternative to, say, government bonds.

So, if anything, this is a vote of NON confidence by Mr. Buffett.  It’s not as if he’s buying anything related to a V recovery, consumer spending, etc. represented by the “bargains” in the travel and leisure or retail sectors.

The sage is being as conservative as possible.

4 comments:

  1. Wow. Interesting! Depressing.

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  2. ...but why would he assume the debt? They wouldn't sell to him otherwise?

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    Replies
    1. Yes, that’s the usual practice. It’s a going, profitable business, obviously more than able to cover its debt service.

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