In 2015, Berkshire Hathaway (BRK-B) acquired Precision Castparts for $37.2 billion. Berkshire already had a minority stake in the company prior to the acquisition. Precision Castparts makes industrial products and supplies to sectors including the aerospace and the oil and gas sectors. Meanwhile, the deal was seen as a proxy exposure to the aerospace sector (BA).
A few months after the deal was announced, Alcoa (AA), which housed an upstream commodity business as well as the downstream business, announced plans to split into two companies. While the split wasn’t totally unexpected, the price that Warren Buffett agreed to pay for Precision Castparts was the most likely trigger for Alcoa’s split. Activist investor Elliott Management had taken a stake in Alcoa a few months before the split was announced.
Berkshire acquired Precision Castparts at a trailing-12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) of 13x. To be sure, Warren Buffett himself minced no words and called the deal expensive. Speaking with CNBC, he said, “This a very high multiple for us to pay.”
Meanwhile, between 2016 and 2018, the aerospace component space (DIA) has seen turbulent times, as is reflected by Arconic’s (ARNC) price action. The company separated from the consolidated Alcoa in 2016. While one cannot really predict how Precision Castparts might have played out as a separately listed entity over the last two years, it would be fair to assume that Buffett would have been able to acquire the company at a much lower price last year. The acquisition was at almost peak valuation for companies in that space.
In the next article, we’ll discuss Buffett’s bets in India.