Turtle Bay Profile picture
Aug 4, 2023 21 tweets 10 min read Read on X
My all-time favorite LBO: Conwood

Buffett called it "one of the best businesses I ever saw." Munger called it "the best deal I ever saw." Pritzker bought it and made ~260X.

Here's the story…

Image
Image
Image
—April 3, 1984—

Conwood, the US's second-largest smokeless tobacco maker, was 'in play'. Management had scrapped a planned merger. Now Conwood needed a friendly buyer. And they had to find one before a raider made a hostile bid for the company.

The solution: Call Jerry Seslowe. Image
Seslowe, a well-connected accountant-turned-investor, was the GP of Resource Holdings ("RH"). RH ran money for some of the sharpest guys on the planet. It also offered deal advisory services. Conwood hired RH to find a friendly buyer.

One potential buyer: Berkshire Hathaway Image
Why Berkshire? Because Buffett and Munger:

- Owned RJ Reynolds stock
- "Knew tobacco and liked it"

Buffett on tobacco economics:
- "It costs a penny to make."
- "It sells for a dollar."
- "It's addictive."
- "And there's fantastic brand loyalty."


Image
Image
Image
Image
What'd Buffett & Munger think of Conwood?

- WB: "One of the best businesses I've seen.
- CM: "The figures were unbelievable."

Conwood's figures (1972-1984 CAGRs):
- Unit growth: 6%
- Price increases: 9%
- Tobacco revenues: 15%
- Net profit: 17%

Cash conversions: ~100% Image
Conwood was, in fact, a near-perfect analog to Buffett & Munger's favorite holding:

See's Candies

CONWOOD VS SEE'S (1972-1984 CAGRs)
- Unit growth: 6% vs 4%
- Price increases: 9% vs 9%
- Revenues: 15% vs 13%
- Net profit: 17% vs 17%

Cash conversions: ~100% Image
Why'd Berkshire pass?

Buffett:
"I'm not sure the logic is perfect, but we wouldn't have trouble owning stock in a [tobacco] company. We wouldn't want to manufacture [tobacco]. We might own a retail company that sells [tobacco]…The lines aren't perfect on this sort of thing." Image
Enter Jay Pritzker.

Pritzker and Seslowe had history. Seslowe was Pritzker's accountant at Peat Marwick. When Seslowe left Peat, he became Pritzker's deal scout. Pritzker was also a big investor in RH.

Jay got the Conwood pitch.

His reaction: "He snapped it up so fast." Image
The purchase price: $350 million (net)

- Consideration: $401 million
- Less net cash: $51 million
= Purchase price: $350 million

Multiples:
- EV/EBIT (LTM): 6.7X
- EV/EBIT (NTM): 6.5x Image
Here's how Pritzker financed the deal:
- $120 million term loan
- $210 million debentures
- $20 million equity
= $350 million purchase price

DEBT/EBIT
- LTM: 6.3X
- NTM: 6.1x

EBIT/INTEREST
- LTM (PF): 1.2x
- NTM (A): 1.4x

LTV: 94% Image
Conwood was the perfect LBO.

Why? Pricing power.

Pricing power allowed Conwood to:
- Grow earnings in the mid-teens.
- Convert ~100% of earnings into cash.

Conwood was also:
- Recession-proof
- Less exposed to litigation
- Retail's highest GMROI SKU

Image
Image
Image
Just how important was pricing power?

Pritzker top-ticked Conwood's core market: non-moist snuff tobacco. From the purchase date, non-moist snuff unit volume declined at a MSD rate. Yet price increases of 10% a year allowed Pritzker to pay off all the LBO debt within six years. Image
How'd the deal turn out?

Conwood continued to…

Raise prices at a HSD rate

…For twenty years.

Then Pritzker sold Conwood for $3.6 billion.

RESULTS
- Purchase (1985): $20 million
- Sale (2005): $3.6 billion
- Dividends (est): $1.5 billion

RETURNS
- TPVI: 260X
- IRR: 49%

Image
Image
Image
Footnote #1

Pritzker bought Conwood through Dalfort. Dalfort was the NOL shell that emerged from the Braniff bankruptcy. It had $400 million in total tax assets.

Also: Dalfort got 95% of the Conwood equity for a cash outlay of $3 million!

[They borrowed the other $16 million]

Image
Image
Image
Footnote #2

Seslowe had an interest in the deal: Image
Footnote #3

Fayez Sarofim got equity in the deal: Image
Footnote #4

Conwood owns the "oldest continually used US trademark": Garrett Scotch Snuff. Garrett dates back to 1782. Image
Footnote #5

Non-moist snuff volumes: Image
Footnote #6 — Pritzker sale to RJR

Lender docs:
Image
Image
Footnote #7 — Pritzker sale to RJR

Rating agency slides:


Image
Image
Image
Image
Want more case studies like this? Let me know by liking or retweeting the post below. I'm also looking for new case study ideas. Know of any great deals or investments? Send me a DM.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Turtle Bay

Turtle Bay Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @turtlebay_io

May 8, 2024
How Warren Buffett earns 50% on small sums:

Bayuk Cigars

In 1982, Buffett bought 6% of Bayuk for his private account. His $572,907 investment produced a 50% IRR with "virtually no risk."

Here's the story… Image
Bayuk was the US's fourth-largest cigar maker. Their low-priced Phillies and Garcia Y Vega brands earned $3M pre-tax but "had been in decline over the past decade." Bayuk also owned $15M of securities. The board wanted to sell these assets "without paying [capital gains] taxes." Image
The solution? Liquidate.

On December 21, 1981, shareholders voted to (a) sell the cigar assets to American Maize, (b) convert the securities to cash and (c) liquidate the company and distribute the proceeds to shareholders.

Liquidation value: $27M ($15 a share) Image
Read 11 tweets
Apr 26, 2024
Warren Buffett on American Express:

"That was my partnership's best investment"

In 1964, Buffett put $2.8M of his $17.5M fund into AMEX. AMEX grew to a 40% holding, "the largest investment the partnership ever made," and compounded at 50% for four years.

Here's the story…

Image
Image
Image
"Things had never looked rosier at AMEX than they did in mid-November 1963." Traveler's checks. Charge cards. Deposits. Earnings. The stock. Everything was "growing by leaps and bounds." AMEX was a "true growth stock of prime investment quality.

But that was about to change.

Image
Image
Image
On December 2, 1963, the WSJ broke a story about fraud at an AMEX subsidiary. American Express Warehousing, Ltd. issued $82M of receipts against salad oil inventory that "was either missing or had never existed." And this subsidiary had just $100K of net worth to back the claims.

Image
Image
Image
Read 19 tweets
Mar 25, 2024
A Case Study in Capital Allocation: Philadelphia & Reading

In 1955, Ben Graham took control of P&R. Over the next 12 years, Graham transformed P&R from a failing coal mine into a high-return holding company.

Here's why P&R was Buffett's
- Largest investment
- Berkshire template

Image
Image
Image
P&R was "a leading producer of anthracite coal." Anthracite was a dying market that had been "artificially inflated" by a postwar boom. And the boom allowed P&R to do "pretty well from 1946 on" despite management that ran the company "like a fine old nonprofit."

Enter Ben Graham

Image
Image
Image
Why'd Graham like P&R?

Three reasons: "room for smart management to make improvements"; an "overcapitalized" balance sheet and "enormous" inventories; and an $18 stock vs $2 of EPS and $32 of equity.

"It was tailored to Ben Graham's specifications as an attractive investment."

Image
Image
Image
Read 14 tweets
Mar 12, 2024
A Buffett 1950s stock:

National American Fire Insurance

NAFI was a long-forgotten fraud. It didn’t file with the SEC or trade on an exchange, and the guy who ran it “hated stockholders.” Yet Buffett went door-to-door buying 10% of the float. Why? See below to find out.

Image
Image
Image
NAFI began in 1919 as a stock promotion. The promoters sold shares to “Nebraska and Iowa farmers and small-town merchants who had little idea what it was worth.” These retail investors soon learned their shares were “worthless” and “lost hope ever seeing their money again.”

Image
Image
Image
For the next 30 years, shares sat “crumbling in drawers.” But NAFI had been transformed from a fraud into a thriving business. Howard Ahmanson, the original promoter’s son, took control and “was feeding top-drawer insurance business into NAFI” through his California S&L empire.

Image
Image
Image
Read 8 tweets
Sep 19, 2023
Constellation Software Memo

"Once the commitment to outsource is made, it becomes increasingly difficult for the customer to change service providers."

Top-performing VMS attributes:
- Outsourcers → Recurring revenues
- Acquisitions → Low-cost CAC
- Cash deals → No dilution Image
ADP:

Image
Image
Image
ADP biography: Image
Read 9 tweets
Sep 18, 2023
Constellation Software's ideal VMS business?

Jack Henry & Associates

They call it "Our Gold Standard for VMS Companies." Bernard Anzarouth, CSI's CIO, wrote a memo about Jack Henry in 1999. Image
Jack Henry Financials: Image
Jack Henry Biography: Image
Read 6 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us!

:(