Ready for the monster of all deals? We crunched some numbers on Warren Buffett’s wish list

Warren Buffett

Warren Buffett’s war chest is ready for his next deal — maybe even his biggest one yet.

The company’s cash swelled to $86.4 billion at the end of 2016, and at this rate it means even takeovers in the $100 billion ballpark are conceivable, as my colleague Noah Buhayar wrote for Bloomberg News this week. He flagged Costco Wholesale Corp. and Nike Inc. as two such megasized possibilities. (Buffett may not strike you as the running-shoe type, but his face has graced pairs of Brooks, a brand owned by Berkshire.)

Buhayar’s piece reminded me that it’s a good time to dust off my screening of potential Berkshire acquisition candidates and lift the cap on deal size. Also, with the company’s annual meeting set to take place in Omaha, Nebraska this weekend, investors will get to pick Buffett’s brain on a variety of things including how he’ll spend Berkshire’s money. Here are the names my refreshed search spit out:

  • 3M
  • Home Depot
  • O’Reilly Automotive
  • Southwest Airlines
  • AltriaHoneywell
  • PepsiCo
  • Stryker
  • Cummins
  • Illinois Tool
  • PPG Industries
  • TJX
  • Deere
  • Ingersoll-Rand
  • Procter & Gamble
  • Union Pacific
  • Delta Air
  • Lyondell
  • Basell
  • Rockwell Automation
  • United Continental
  • DuPont
  • Monsanto
  • Ross Stores
  • United Technologies
  • Emerson Electric
  • Nike
  • Sherwin-Williams
  • VF

Why these companies specifically? Buffett used to detail his takeover criteria in his annual letter to shareholders but stopped doing so in 2015. Still, we can probably assume that it hasn’t changed much: large yet simple businesses that he can grasp, with consistent earning power, good returns on equity and little or no debt. My search excludes companies with market values under $20 billion and any banks and financial-service firms, defence contractors, technology makers, health-care providers and companies operating in the gambling, entertainment-media and advertising spaces, since realistically they’re less likely to appeal to Buffett.

He also prefers companies with very valuable brands that could be around forever, such as the consumer names he owns including Fruit of the Loom, as well as capital-intensive businesses with high returns, such as BNSF railroad. Buffett also has a taste for industrial-products makers with strong competitive advantages, such as Precision Castparts, the aerospace-parts maker he acquired last year.

Nike checks these boxes, as does chocolate maker Hershey Co., tractor maker Deere & Co., engine manufacturer Cummins Inc. and 3M Co., which these days sells everything from Scotch tape to electronic ankle monitors. They’re all iconic brands in their respective industries with strong, reasonably predictable profitability.

Costco didn’t make the list, and that’s because it typically earns only around 3 cents in operating profit for each dollar of sales, and I had weeded out companies with operating margins below 10 percent on a GAAP basis. That said, I certainly wouldn’t rule out the warehouse-club chain — strategically and financially it makes sense for Berkshire. Costco had 86,700,000 total cardholders at the end of fiscal 2016, and its member renewal rate was 90 percent in the U.S. and Canada. You could say it’s similar to the insurance float that Berkshire enjoys.

Three of the airlines that Berkshire built large stakes in during the past few months also have the hallmarks of Berkshire’s targets. There’s Delta Air Lines Inc. and United Continental Holdings Inc., of which Berkshire is the largest shareholder, and Southwest Airlines Co., where it has the second-biggest stake. Airlines have come such a long way since Buffett swore off the industry 16 years ago, United didn’t even have to drag him back.

Another interesting name that made the cut: PepsiCo Inc. I feel pretty confident in saying that Buffett — who got his start selling bottles of Coke door-to-door and is now Coca-Cola Co.’s largest investor — isn’t going to buy Pepsi. However, there has been speculation that Buffett and 3G Capital, which together control Kraft Heinz Co., could team up next on a three-way transaction involving Pepsi, Kraft and Anheuser-Busch InBev (another 3G company). I explained the idea and the caveats to it here last month.

Three of the airlines that Berkshire built large stakes in during the past few months also have the hallmarks of Berkshire’s targets

Speaking of 3G, the private equity firm is expected to find another megadeal for Kraft Heinz soon, after early merger talks with consumer-products giant Unilever leaked to the press prematurely. Berkshire has so much cash that it can help bankroll Kraft’s next transaction, while also finding another large company for itself to bring in-house. Even with the minimum $20 billion cash cushion that Buffett likes to keep, there’s no shortage of funds for a 12-figure Berkshire deal. It could sell off equity holdings to raise money (cough, American Express Co.?), or take on debt, as it did to fund part of the Precision Castparts acquisition.

Based on the data, Buffett might take a call from any of these companies. But which one will call him up and name a price? We’ll just have to wait and see.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Buffett does like to drive a bargain. But with stocks commanding richer valuations than perhaps he’s used to paying, you may notice that I’ve included companies with price-earnings ratios less than or equal to which is just a tad higher than the multiple for the S&P index. Some, like Hershey, which is also speculated to be a target for Mondelez International Inc., may have takeover premiums baked in. Just like Pepsi, there are some companies that look like good candidates on paper but wouldn’t make sense for Buffett, such as Altria Group Inc., the maker of Marlboro cigarettes. And while in theory there may not be cost constraints for Berkshire if it wanted to be ambitious, an outright purchase of a company as large as Home Depot Inc. or Procter & Gamble Co. is highly unlikely.


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