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…
—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.
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.
Buffett on tobacco economics:
- "It costs a penny to make."
- "It sells for a dollar."
- "It's addictive."
- "And there's fantastic brand loyalty."
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%
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%
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."
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."
The purchase price: $350 million (net)
- Consideration: $401 million
- Less net cash: $51 million
= Purchase price: $350 million
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%
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
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.
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%
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]
Footnote #2
Seslowe had an interest in the deal:
Footnote #3
Fayez Sarofim got equity in the deal:
Footnote #4
Conwood owns the "oldest continually used US trademark": Garrett Scotch Snuff. Garrett dates back to 1782.
Footnote #5
Non-moist snuff volumes:
Footnote #6 — Pritzker sale to RJR
Lender docs:
Footnote #7 — Pritzker sale to RJR
Rating agency slides:
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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…
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."
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.
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…
"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.
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.
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
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
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."
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.
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.”
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.