Berkshire Hathaway's US$200M acquisition of The Omaha World-Herald will not likely change its overall acquisition strategy, says Fitch; ratings company considers move 'more nostalgic than strategic'

Kendall Sinclair

NEW YORK , December 5, 2011 (press release) – Fitch Ratings says Warren Buffett appears to be showing a bit of sentiment reflected in his most recent acquisition announcement. The chairman and chief executive of Berkshire Hathaway Inc. (BRK) announced last week that BRK would be acquiring The Omaha World-Herald Co. for $200 million, $150 million of that total in cash. The print media company is located in Buffett's home town of Omaha, Nebraska.

Fitch believes the World Herald acquisition is interesting, as Buffett has been critical of the newspaper industry, pointing out that declining readership has contributed to major losses already compounded by weak advertising revenue. Still, the print media buy has precedent, as BRK has a $565 million stake in the Washington Post (amounting to less than 1% of common stock investments) and ownership of New York-based Buffalo News.

Berkshire is a huge conglomerate with close to 200 companies across diverse businesses including insurance, finance, utilities, manufacturing, and retail. Berkshire tends to acquire companies with a history of profitability and successful management team. A cash build up has led Berkshire to publicly state its intention to make additional acquisitions. In 2010, BRK's $26 billion purchase of Burlington Santa Fe also caught many investors off guard but has proven to be a solid source of cash flow for the company.

While nontraditional, the World-Herald buy is not likely a change in BRK's overall acquisition strategy.

As his successor is eyed, Fitch is considering trends in BRK investments. Buffett's latest purchase may appear unconventional, but it is not the first time the CEO has strayed from his investing blueprint. Last month, Buffett unveiled an $11 billion 5.5% purchase of International Business Machines (IBM) spanning eight months. Up until then Buffett was notorious for avoiding investing in the technology sector.

In addition, the latest deal size is very small versus others. In March, BRK announced an agreement to acquire specialty chemicals company Lubrizol for $9 billion in cash and the assumption of approximately $700 million in net debt.

Fitch believes that BRK has solid debt service capabilities due to its subsidiaries' strong operating cash flow and dividend capacity that exceed its annual cash interest requirements. Management has publicly stated its intention to maintain $20 billion in cash within the consolidated enterprise and has approximately $6 billion at the holding company level.

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