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