Thursday, May 6, 2010

"Munger Comments on Potential for Wesco to Become Wholly Owned by Berkshire" (WSC; BRK.B; BRK.A)

From The Rational Walk:
Wesco Financial Corporation held its 2010 annual meeting in Pasadena, California on May 5. Wesco Financial is a 80.1 percent owned subsidiary of Berkshire Hathaway. While the Berkshire Hathaway annual meeting attracted approximately 37,000 attendees on May 1, the Wesco meeting is a much lower key event. The main attraction is the opportunity to listen to Charlie Munger’s views on business, the economy, and a variety of other topics.

Will Wesco Become a Wholly Owned Berkshire Subsidiary?

According to a 8-K SEC report filed today, Mr. Munger had the following to say about the possibility of Berkshire eventually acquiring the remaining 19.9 percent interest in Wesco:

At the Company’s Annual Meeting of Shareholders, the Company’s Chairman and Chief Executive Officer, Charles T. Munger, who is also vice-chairman of Berkshire Hathaway Inc. (“Berkshire”), which owns 80.1% of the Company’s outstanding stock, said that it would be logical for the Company to ultimately become wholly owned by Berkshire. Mr. Munger cautioned, however, that such a combination transaction, to the extent it would involve stock consideration, would only make sense if there was an appropriate relationship between the relative values and prices of Berkshire’s stock and the Company’s stock, and that such a relationship does not currently exist. Mr. Munger did not state any particular time frame for such a transaction. No combination transaction of any kind has been proposed or presented to the Company. The Company’s Board of Directors has not discussed or considered any such transaction and neither has Berkshire’s Board of Directors.

This statement is interesting primarily because it contains a reference to the relative valuation between the common stock prices of Wesco and Berkshire and suggests that the companies are currently trading at different levels relative to intrinsic value.

Valuation of Berkshire vs. Wesco

Reflecting on Mr. Munger’s statement, the desire to have both Berkshire and Wesco trade at similar levels relative to their respective intrinsic values makes perfect sense given the desire of management to treat all parties to the transaction fairly. To the extent that Berkshire stock is used to compensate Wesco shareholders, each side should receive as much intrinsic value as they are giving up....MUCH MORE