2003: McLane and Clayton Homes

WARREN BUFFETT: We’ve made — we’ve contracted to make — two acquisitions this year.

You just read about one, perhaps, in this morning’s paper, but it went on the tape at 7:45 yesterday morning, Central Time, and that involved the contract to buy McLane’s from the Walmart company.

McLane’s is the very large wholesaler to all kinds of institutions, but convenience stores, quick-serve restaurants, the Walmart operation itself, theaters, restaurants.

And this year we’ll probably do something like 22 billion of business. So it’s a very substantial enterprise, with distribution centers around the country, with much in the way of transportation equipment.

Walmart had owned McLane’s since about, I believe, 1990. It grew substantially while they owned it. It’s been run by a terrific manager who’s here with us today, Grady Rosier, and Grady took the business from 3 billion to 22 billion, or thereabouts.

Walmart, for very good reasons, wants to specialize in what they do extremely well, and through Goldman Sachs and Company, we were approached by them a little while back about the possibilities of buying the business.

It’s a — it really makes sense for both sides, because Walmart knows what to do with the capital very, very well in their own business, and has lots of opportunities. And this was something of a sideline to them.

On the other hand, their ownership of McLane’s resulted in certain people that would be logical customers of McLane’s not wanting to do business because they didn’t want to do business with a competitor.

And we plan to see all those people very soon, and explain to them that that’s no longer the case, and they can sleep well at night doing business with us and not worry about benefiting their competitor, Walmart.

So this deal — a representative of Walmart came up last Thursday to Omaha, a week ago this past Thursday, a CFO. And we made a deal in, maybe, an hour or two and shook hands. And when you shake hands with Walmart, you have a deal.

And so the time remaining until yesterday morning, a contract was put together and it must go through the Hart-Scott-Rodino process in — to be cleared. But there’s obviously no conflict, so we fully expect that, in just a few weeks, that McLane’s will become part of Berkshire.

It serves, presently, about 36,000 of the 125,000 or so, convenience stores. If you take the 50 largest convenience store chains in the country, it does 58 percent of the business with those companies. Sells each convenience store an average of, perhaps, 300,000 or a slight bit more of product a year, which those convenience stores then resell to the consumer.

It also serves about 18,000 quick-serve restaurants, primarily those operated by Yum! Brands: the Taco Bell, and Pizza Hut, and Kentucky Fried Chicken group.

And it will have opportunities to serve many more as we go along. So we’re delighted.

If any of you get a chance to see Grady, or better yet, if any of you own a convenience store, step forward and we’ll be glad to give you our card. (Laughter)

It’s really — you know, Walmart knows that we will be a good owner, they know we’ll be good for the people that work at McLane’s.

They know our check will clear, that we won’t, you know, make a proposition and then run into financing difficulties, or try to jiggle around the contract later on.

And it’s just an ideal way to do business, and we’re delighted to add McLane’s to the Berkshire group of companies.

It’s a very narrow-margin business, obviously. I mean, when you get up to 22 billion of sales and you’ve got Hershey, and Mars, and people like that on one side, and you’ve got buyers like 7-Eleven and Walmart on the other side, they’re not going to leave a lot in between.

But you have to perform a valuable service for them in order to earn, you know, say, one cent on the dollar, pre-tax.

But McLane’s knows how to do it. It’s a very efficient operation, and it will continue to deliver value to both their vendors and their customers.

The other acquisition that is in the works is Clayton Homes. Clayton is the class of the manufactured home industry, and the acquisition came about in kind of an interesting way.

Every year for the last five years, a group of about 40 finance students from the University of Tennessee in Knoxville would come up to Omaha, and they would have a lot of fun in Omaha. They’d go to the Furniture Mart.

And then in the afternoon they’d come to Kiewit Plaza and the 40 students or so, with their professor, Al Auxier, would have a session with me. We’d just have a classroom session for a couple of hours, and wonderful group of students.

And generally at the end of the session they would give me a football, or a basketball, they’ve got a great women’s basketball team at the University of Tennessee, and so we’d have a good time together.

And, matter of fact, a year ago, when they came up, Bill Gates, by chance, was in town. So I presented him as a substitute teacher, which is a post he’s always wanted. (Laughter) And students got quite a surprise.

This year when they came, 40 or so students, we had a good session together, a couple of hours at Kiewit Plaza. And when they got through, they gave me a book. And it was the autobiography of Jim Clayton, who started and ran Clayton Homes, and built it into a huge success.

And he’d written a nice inscription inside, and I mentioned to the students and the professor that the — that I was an admirer of Clayton. I’d followed the manufactured home industry in other ways, not always so successfully, and I’d seen what Clayton had done.

And so I said I look forward to reading the book, which I did. And then I called Kevin Clayton, Jim Clayton’s son, and Kevin is the CEO of the company. And I told him how I’d enjoyed his dad’s book.

And I said we still had a little money left in Omaha — (laughter) — and, if they ever decided to do anything, you know, we would be interested. And I suggested at what price we might be interested in.

A phone call or two later, a couple of phone calls, we made a deal.

And I had not been to Knoxville. You know, I checked out a few manufactured homes. Suggested that my family buy a repo. (Laughter)

But that deal came about in that manner. And that’s the way things tend to happen at Berkshire.

It, you know, the phone rings or we pick up the phone, in this particular case. And the manufactured home industry got into significant trouble, very significant trouble, because credit terms — well, they went crazy on credit four or five years ago.

And when you go crazy on credit, you suffer in a very big way, and that’s what happened to that industry.

Conseco, that some of you may have read about, ended up holding — or servicing I should say — $20 billion worth of manufactured home credit and they got in big trouble, for that and other reasons.

And Oakwood, where we own some junk bonds, went into bankruptcy. They’re a big operation in the country, most of the — couple of the other biggest players in the industry are losing significant money.

Manufactured home companies have lost the ability to securitize the receivables they get when they sell these — when they sell homes. And so the industry’s been in the tank.

This year, or this past year, there were maybe 160,000 new manufactured homes sold, but there were also about 90,000 repos came back and that depresses the market enormously. And like I say, financing sources have dried up. A lot of people that lent money have left the field.

So for the strong, as Clayton is, and particularly with the financial backer like Berkshire, it should be a good field. Twenty percent or so of all the new single-family homes are manufactured homes in this country.

I mean, you can — we can put you in one for about $30 a square foot, and if you compare that to a site-built home, it’s quite a deal. I mean, I was amazed.

They have 2,500 square foot homes, two stories, I mean, it’s changed a lot over the last 30 or 40 years.

And we’ve got an operation that is, even the competitors would admit, it’s clearly the class of the field.

But even for Clayton, financing was getting more difficult. I mean, the lending community got burned very badly in manufactured homes, and people have sworn off them, from the lending standpoint.

And Clayton did securitize an issue in February this year, but they had to keep more of the bottom layers of the securitization themselves.

So it’s a good marriage, and it’s one where we will be useful to them. And we should do very well together in the future.