Buffett to Acquire Dairy Queen Chain for $585 Million

Warren Buffett’s Berkshire Hathaway Inc. on Tuesday agreed to buy International Dairy Queen Inc. for $585 million in cash and stock, adding the ice cream and hamburger chain to a portfolio stuffed with insurance, candy, shoe and newspaper holdings.

Omaha-based Berkshire will pay $27 a share in cash or $26 in either of its two classes of stock for each Class A and Class B share of Dairy Queen, whose roots date to 1939, when a Green River, Ill., ice cream maker joined forces with a refrigerator inventor.

Some analysts saw the purchase of Minneapolis-based Dairy Queen as a departure from Buffett’s practice of buying stakes in companies, such as Coca-Cola Co. and Gillette Co., that dominate their businesses. Berkshire also has big investments in American Express Co., Walt Disney Co. and Washington Post Co.

Dairy Queen Class A shares climbed $2.63 to close at $26.75 and its Class B shares rose $2.13 to close at $27.38 on Nasdaq.

Berkshire’s Class A shares rose $400 to close at $45,000, while its Class B stock gained $16 to close at $1,501 on the New York Stock Exchange.

Dairy Queen got its start when J.F. McCullough invented a machine for making soft ice cream in 1938 and named it after his cow. A year later, McCullough joined with Harry Oltz, who invented a way to keep ice cream at a constant temperature. They sold franchisees the right to use the machines and collected royalties on the gallons of ice cream sold.

The company thrived in the 1950s and 1960s as middle-class Americans flocked to the suburbs and filled newly built interstate highways. By 1950, there were 1,156 Dairy Queens.

While franchisees worked under the Dairy Queen trade name, there was little uniformity in products until 1970, when a group of investors led by John Mooty bought the company for $5 million and standardized operations.

Dairy Queen licenses about 5,790 DQs in the U.S., Canada and overseas, though only 34 are company-owned. An additional 410 stores sell its Orange Julius fruit drinks.

One investor said Buffett is getting a good deal. “It’s right up his alley,” said Stephen Yacktman of Yacktman Asset Management in Chicago, who owns almost 1 million of Dairy Queen’s Class A shares.

Dairy Queen derives a constant flow of income from franchisees, and has low overhead because it owns so few stores. So long as a store stays in business, Dairy Queen “is pretty much guaranteed a revenue stream,” Yacktman said.