2016: Did Berkshire overpay for Van Tuyl’s auto dealer business?
JONATHAN BRANDT: Berkshire paid 4.1 billion for Van Tuyl’s auto retailing business and consolidated its earnings for nearly ten months last year.
Given prevailing acquisition multiples in the industry, and margins, and the record level of retail auto sales, it seems that the acquisition should have contributed more to Berkshire’s bottom line in 2015 than it seemed to, although it’s hard to tell for sure since its results were lumped in with those of the German motorcycle apparel acquisition, which was only owned for a part of the year, also.
I understand the deductive — tax-deductible intangibles reduce the effective purchase price of Van Tuyl, but I still wonder whether there were any one-time charges or whether profits from insurance and finance operations could have been reported somewhere other than in the retail segment?
WARREN BUFFETT: Yeah.
JONATHAN BRANDT: I imagine Berkshire is earning a better return on the acquisition than is so far apparent, but I wonder if you could explain the difference between the likely economics of the deal and what I infer from the annual report figures.
WARREN BUFFETT: Yeah. Well, you’re right about it. It is better than it looks.
For one thing, we got a billion dollars of securities, roughly, with the 4.1, and those securities we’re basically carrying at a quarter of a percent. But that billion is available to us, and that came with the deal.
There’s some very significant acquisition accounting charges that will continue for a couple of years, and that I’m happy to have taken that way.
The economics of Van Tuyl, I would say, have worked out almost exactly as — if you had me, a year ago, lay out a projection — I don’t do it — but if I had, it would look very much like things have turned out.
And Jeff Rachor, who runs that operation, really fits the Berkshire mold. I mean, we’ve got a first-class CEO there.
But take a billion off the purchase price just for openers, and then there are some amortization charges of items that are allowable that make you correctly see a fairly low figure against what it appears the acquisition price was. So far, it’s exactly on schedule, and the schedule was perfectly satisfactory.
OK. Station 2.
We haven’t — incidentally — we haven’t had much luck, so far, in acquiring other auto dealerships based on the same metrics that we bought Van Tuyl. And I think to a small degree, that’s because people think we paid more for Van Tuyl than we did.
They’re not seeing certain factors in it, so they think we paid X, and therefore they’re entitled to X, and we didn’t pay X, so we haven’t made — we’ve bought very little so far. I hope that changes in the future.
But we’re not going to change — we’re not going to change our metrics, in terms of how we value auto dealerships.