Berkshire Enters into Agreement to Acquire Wesco; “Afternoon With Charlie” Planned

Berkshire Hathaway and Wesco Financial Corporation have announced (pdf) a definitive  merger agreement in which Berkshire will acquire the remaining 19.9 percent of Wesco’s common stock that it does not currently own.  Berkshire announced its intention to pursue the acquisition in August 2010 and the final terms of the agreement appear to mirror the initial offer.

Although there was some speculation at the time regarding the potential for Berkshire to pay a premium over Wesco’s book value, Warren Buffett indicated that Berkshire had no plans to do so.

Terms of the Agreement

According to the news release issued this morning, each share of Wesco common stock not owned by Berkshire Hathaway will be converted into the right to receive an amount either in cash or Berkshire Hathaway Class B common stock in a manner that should closely reflect Wesco’s book value when the transaction closes:

The merger agreement provides that each share of Wesco common stock not owned by Berkshire Hathaway will be converted into the right to receive an amount, either in cash or Berkshire Class B Common Stock, at the election of the shareholder, equal to: (i) $386.55 (which represents Wesco’s per share shareholder’s equity as of January 31, 2011, estimated for purposes of the Merger Agreement), plus (ii) an earnings factor of $.98691 per share per month from and after February 1, 2011 through and including the anticipated effective time of the merger (pro rated on a daily basis for any partial month), plus or minus (iii) the change in net unrealized appreciation of Wesco’s investment securities and the amount of net realized investment gains or losses with respect to Wesco’s investment securities (expressed on a per share basis, net of taxes) from February 1, 2011 to the close of business on the second full trading day prior to the date of the special meeting of the shareholders of Wesco to vote on the transaction (the “Determination Date”), minus (iv) the per share amount of cash dividends declared with respect to Wesco’s common stock having a record date from and after February 4, 2011 through and including the anticipated effective time of the merger, and minus (v) certain fees and expenses incurred by Wesco in connection with the transaction (expressed on a per share basis).

Wesco shareholders who elect to receive Berkshire stock will receive Class B shares with the exchange ratio based on the volume-weighted average price per share of Berkshire Class B stock for the 20 trading days prior to the close of the transaction.

The transaction is subject to approval of a majority of the outstanding shares that are not owned by Berkshire Hathaway and the vote is expected to occur at some time during the second quarter.  The companies indicate that if the vote occurs prior to early June, there will be no 2011 Wesco annual meeting but Charlie Munger will plan to hold an “Afternoon with Charlie” event in Pasadena soon after the transaction to answer questions “about business, economics and life (but not about Wesco)”.

For more information regarding Berkshire Hathaway, pre-order The Rational Walk’s upcoming report:  “In Search of the Buffett Premium”, scheduled for release in early March or subscribe to The Rational Walk’s Berkshire Hathaway Corner to receive the report and ongoing updates regarding the company.

Disclosure:  Long Berkshire Hathaway, no direct position in Wesco Financial.

Berkshire Hathaway Will Not Increase Wesco Bid

Warren Buffett is not planning to increase the terms of his offer for the 19.9 percent stake in Wesco Financial Corporation that Berkshire does not already own.  In a filing with the SEC today, Mr. Buffett characterizes the current offer as “fair” and clearly states that Berkshire has “no interest in effecting a transaction at a higher price”.

As we reported last week, Berkshire Hathaway has made an offer to acquire Wesco shares at book value which represents a premium to the market price of Wesco shares prior to the announcement of Berkshire’s bid.  The deal has been structured in a manner that allows Wesco shareholders to exchange their shares for Berkshire Hathaway Class B shares in a tax free transaction. Wesco shareholders may also elect to receive cash for all or part of their holdings.

Mr. Buffett’s letter also clarifies the manner in which the purchase price will be calculated.  The starting point for the calculation will take Wesco’s September 30, 2010 book value and then adjust that value based on an estimate of Wesco’s retained earnings from October 1 to the date of Wesco’s special meeting to vote on the proposal.  In addition, changes in the fair value of investment securities will be calculated and Wesco’s book value will be adjusted accordingly. This assumes that the transaction will take place sometime during the 4th quarter.

Over the past few days, there have been reports of shareholder lawsuits claiming that Berkshire’s offer does not treat Wesco’s minority shareholders fairly.  This seems like a dubious claim given the fact that the transaction will not proceed without a majority of the Wesco shares voting in favor excluding shares owned by Berkshire. While Mr. Buffett indicates no interest in a richer bid, he does say that if the transaction is not approved, there will be no “hard feelings” and Wesco will continue to operate as it has in the past.

In related news, Wesco announced today that CORT will acquire Lounge22.  Terms of the transaction were not disclosed.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.  No direct position in Wesco Financial.

CORT Acquires Lounge22 Rental Business

According to a press release issued today, CORT has acquired the rental operations of Lounge22, including product and exclusive rights to market the rental brand on a global basis.  CORT is a subsidiary of Wesco Financial Corporation which is an 80 percent owned subsidiary of Berkshire Hathaway.  Last week, Berkshire Hathaway filed a disclosure with the SEC indicating that it will attempt to acquire the 20 percent of Wesco that it does not already own.

CORT’s business operations suffered during the recession and sales remain weak.  However, as we discussed in our review of Wesco’s Q2 results, management has returned the business to profitability through cost cutting initiatives.  The acquisition of Lounge22 may be intended to boost long term growth prospects by expanding the selection of high end furnishings that are available to CORT customers.

As the main player in the “rent to rent” market, CORT’s business operations have suffered due to slower business formation during the recession as well as decreased activity in trade shows and similar events.  CORT reported net income of $6.7 million for the second quarter and $8.4 million for the first half of 2010 which was up sharply over prior year levels.  However, revenues dropped 4.25 percent for the second quarter and 9 percent for the first half compared to the same periods in 2009.

Terms of the Lounge22 acquisition were not disclosed in the press release.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.  No direct position in Wesco Financial.