Buffett to Buy Pilot-Training Firm, in His First Big Deal of 1996
In a year of record corporate takeover activity, master investor Warren Buffett has finally put in a bid for something. But a mega-deal it isn’t.
Buffett’s holding company, Berkshire Hathaway, on Tuesday announced it will buy FlightSafety International for about $1.5 billion in cash and stock, marking the billionaire’s first big acquisition of a new business since mid-1995.
Unlike some of Buffett’s major stock investments--such as Coca-Cola and Gillette--FlightSafety isn’t a household word. The Flushing, N.Y.-based firm provides simulator-based training for pilots and people who maintain planes and ships.
And anyone hoping to read into Buffett’s purchase a justification for the U.S. stock market’s record-high level will be sorely disappointed.
The nation’s second-richest man is buying a stock that has languished for much of the 1990s. His bid for FlightSafety, $50 a share in cash or $48 worth of Berkshire Hathaway stock, is at a minimum 23% below the company’s all-time high price (reached in 1990) and is even 17% below the 1996 peak price of $60.
Still, the bid is a 14% premium to FlightSafety’s recent price. The stock jumped $5.375 to $49.25 on the New York Stock Exchange on Tuesday.
For Buffett, the deal conceivably provides some use for the $574 million in cash raised in last spring’s public offering of a new, lower-priced class of Berkshire shares. Buffett said he issued that stock only to thwart third parties who intended to market a synthetic version of a lower-priced Berkshire, whose Class A shares are the highest-priced NYSE issue, at $31,700 each as of Tuesday.
Yet the FlightSafety price tag of $1.5 billion is well below the $3-billion-to-$5-billion deal range that Buffett specifically said he’d be interested in doing, as spelled out in the latest Berkshire annual report.
The 65-year-old sage is never in a hurry to do any deal, of course. That would contradict the essence of Buffett, which is to invest only after great research and to buy only what constitutes true value.
But that also points up the seeming contradiction of Buffett today: His stock portfolio, as opposed to his portfolio of businesses owned in full (as FlightSafety will be), includes some of the priciest blue-chip stocks on the market, such as Coke, Gillette and Walt Disney. Buffett says he prefers to sell a great stock “never.” One wonders, though: If he wouldn’t buy them at these high prices relative to earnings--and we can only assume he wouldn’t--doesn’t that suggest they should be sold?
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FlightSafety, at least, is a vintage Buffett acquisition, adding to Berkshire’s portfolio of often mundane but very profitable operating companies. FlightSafety, with estimated 1996 sales of $360 million, has virtually no debt, it appears to be the leading company in its field, and Buffett clearly thinks management has done a good job so far and should be kept.
In his only comment Tuesday, via written statement, Buffett said that “FlightSafety is a business that I like, run by a man I like and admire,” FlightSafety’s 78-year-old chief, Albert Ueltschi.
Ueltschi, who along with family and corporate insiders owns 37% of FlightSafety’s stock, said he’ll opt to take Berkshire stock in the deal, which he said “I personally consider . . . to be one of the finest investments that I could make, and [I] anticipate holding the shares indefinitely.”
An investment banker familiar with the deal said it came about like this: “Warren had been looking at this company for a long time. He called and said he wanted to meet Ueltschi.” Negotiating the price took just a matter of days, the banker said.
The price works out to about 15 times FlightSafety’s estimated 1997 earnings of about $3.35 a share, a level well below the screamingly high price-to-earnings ratios of many U.S. stocks these days. Yet the few analysts who follow FlightSafety were divided on whether Buffett paid too little or too much relative to earnings.
Paul Nisbet, at JSA Research Inc. in Newport, R.I., said FlightSafety’s appeal is that it seems to be in the midst of a new growth spurt, after a stagnant earnings period from 1990-94.
In the commercial aviation business, “We’re in a very strong up-cycle again, with airlines making huge orders for new aircraft,” Nisbet noted. Somebody has to train the pilots and maintenance personnel for those planes.
Yet FlightSafety’s earnings have been below expectations this year. On Tuesday it reported third-quarter results flat with a year ago. The firm says its heavy investment in new flight simulators is in part hurting results. But it also appears that some major airlines are pinching FlightSafety’s margins by getting into the training business themselves.
Moreover, David Tice, who heads a research firm in Dallas, worries that the airline business could be nearing a cyclical peak and that many plane orders could be canceled if the economy weakens.
Tice also pointed out one potential irony of Buffett’s move: One of the few investments Buffett’s regretted in recent years was his purchase of a $358-million equity stake in USAir in 1989. Berkshire has since written off 75% of that investment, and in the 1994 annual report Buffett wrote that he simply didn’t foresee the debilitating effects of deregulation on high-cost airlines like USAir.
Of course, FlightSafety isn’t an airline--it just works for them. And although the company also seems more high-tech than what Buffett usually likes to buy--jewelry and furniture retailers, candy makers and insurance companies, for example--the fact is that Buffett’s investment mistakes have been few and far between.
That is, after all, pretty much the only way you accumulate $15 billion in personal wealth.
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Hardly a Rocket
FlightSafety International has essentially been a no-show in the 1990s bull market: Its share price, even after Berkshire Hathaway’s takeover offer on Tuesday, is far below its peak price of $65.25 reached in 1990. Yearly highs and latest on the New York Stock Exchange:
Tuesday: $49.25
Source: Value Line Investment Survey
