Basics of the Precision Castparts Deal

Brent Nyitray, CFA, MBA
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Warren Buffett Acquires His Elephant: Precision Castparts

(Continued from Prior Part)

Basics of the transaction

As we saw in the first part of this series, Berkshire Hathaway (BRK-B) is buying Precision Castparts (PCP) for $235 in cash per share, for a total cash transaction of about $37 billion including PCP debt.

Management comments on the transaction

“I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s Board of Directors is proud that PCC will be joining Berkshire,” noted Warren E. Buffett, Berkshire Hathaway chairman and CEO, on August 9.

Conditions precedent

The following conditions need to be satisfied in order for the deal to close:

  • Precision Castparts shareholder vote

  • US Securities and Exchange Commission approval of the proxy statement

  • Hart–Scott–Rodino Antitrust Improvements Act filing

  • any other foreign approvals, if required

Nonsolicitation agreement and breakup fee

Precision Castparts has a nonsolicitation agreement with a fiduciary out. This means that prior to shareholder approval of the transaction, Precision Castparts can discuss a merger with another suitor, if approached.

If a bidder happens to come in and top the Berkshire Hathaway bid, Precision Castparts will owe Berkshire Hathaway a breakup fee of $600 million.

How Berkshire Hathaway will finance the deal

On CNBC, Warren Buffett said that Berkshire Hathaway will use approximately $23 billion of cash on hand to finance the transaction, along with about $10 billion in new debt.

Other merger arbitrage resources

Other significant merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) is expected to close by the end of 2015. For a foundational look at risk arbitrage investing, please refer to Merger arbitrage must-knows: A key guide for investors.

Investors who would like broad exposure to the industrials space can consider the S&P SPDR Industrials ETF (XLI).

Continue to Next Part

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