(BRKA) Berkshire Hathaway Cuts Wesco Financial Offer

Yesterday, Warren Buffett, the chairman and chief executive officer of conglomerate Berkshire Hathaway Inc. (BRKA) (BRKB) renegotiated the offering price to Wesco Financial Corp. (WSC) at $385.00 per share in cash. This is the third time that the price has been adjusted.

In February 2011, Buffet had formally entered into a binding agreement to acquire19.9% of Wesco. In September last year, Buffet had announced the intention to acquire Wesco, of which Berkshirealready owns 80.1%.

At the time of entering into the formal agreement in February, Buffet pegged the exchange rate at $386.55, based on Wesco’s estimated book value per share at the end of January 31, 2011. Thereafter in March it increased the offer price to $392.91, but scaled back the price to $389.01 in April again. These changes came on the back of fluctuation in the value of Wesco’s stock holdings.

However, the newly set offer price of $385.00 per share incorporates Wesco’s net worth per share of $386.55 as on January 31, 2011 along with $4.74 per share of earnings for the period between February 1st and June 24th and deducting $6.29 per share for decline in value of Wesco’s investments ($5.49), dividends already paid to Wesco’s shareholders’ ($0.42) and approximate expenses and fees relating to the merger ($0.38).  On the basis of newly quoted offer price of $385.00 the deal valuation comes at $539 million, which will see 1.4 million shares exchanging hands.

Wesco shareholders will vote on the deal today. Based in California, Pasadena, Wesco has been 80.1% owned by Blue Chip Stamps (“Blue Chip”), a wholly-owned subsidiary of Berkshire since 1983. Thus, Wesco and its subsidiaries are controlled by Blue Chip and Berkshire. All of these companies may also be deemed to be under the control of Buffett, who owns 24.3% of Wesco’s stock.

Wesco is run and controlled by Charles T. Munger, who is also the vice chairman of Berkshire Hathaway. Munger consults with Buffet on Wesco’s investment decisions, major capital allocations and the selection of chief executives to head each of its operating businesses.

Though varying in sizes, both the companies – Berkshire and Wesco – are similar in terms of business operations. Like the former, Wesco is also a conglomerate, which houses businesses like insurance, furniture rental and industrial products. Its insurance segment consists of the operations of Wesco-Financial Insurance Co. and Kansas Bankers Surety Co. The furniture rental segment consists of the operations of CORT Business Services Corp. The company’s industrial segment comprises Precision Steel’s service center and industrial supply operations. Wesco also holds shares in some of the same companies as Berkshire, like Coca-Cola, Kraft, Procter & Gamble, and Wells Fargo.

Wesco continues to have a strong consolidated balance sheet, with high liquidity and relatively little debt. Furthermore, its equity investments are in strong, well-known companies.

Buffett intends to convert Wesco into a wholly-owned subsidiary of Berkshire, by deploying enormous cash of approximately $28 billion at Berkshire and also to simplify operations at Wesco. Besides Munger is already 86 and would not carry on with the role of its chairman for long. Moreover, with 80.1% of interest and a lot of involvement with Wesco it Berkshire just makes good business sense to own it completely.

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