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What Berkshire's Sale Means for Wells Fargo

Greggory Warren, CFA

We were not overly surprised to see wide-moat-rated Berkshire Hathaway (BRK.B) step away from its pursuit of a ruling from the Federal Reserve that would have allowed the insurer to not only maintain its greater than 10% ownership stake in wide-moat Wells Fargo (WFC), but be able to add to it in the future if market conditions provided opportunities for additional investments. Berkshire surpassed the 10% threshold with Wells Fargo during the first half of last year and has been in discussions with the Fed ever since, looking for ways to limit the amount of special oversight the regulators would have required based on its ownership stake.

In the end, Berkshire decided the commitments the Fed was asking for were more restrictive than it hoped for, so the insurer sold 7.1 million shares this week and expects to sell another 1.9 million shares of Wells Fargo before the end of June, leaving its ownership stake below the 10% threshold.

Berkshire did note that these sales were not being made because of investment or valuation considerations, which was an important distinction for Wells Fargo, which has seen its fair share of negative headlines the past year. Our $66 per share fair value estimate for the bank is more than 20% higher than the April 12 trading price, though, so Berkshire is clearly leaving some money on the table. That said, the 9 million shares the firm is selling reflects less than 2% of Berkshire's 479.7 million share stake in Wells Fargo, which remains the insurer's second-largest holding behind narrow-moat Kraft Heinz (KHC). And the estimated $450 million in proceeds Berkshire will take away from the sales is minuscule compared with the $86.4 billion in cash and cash equivalents the firm had on its books at the end of the fourth quarter of 2016, so the move is unlikely to have any real impact on our valuation. We are leaving our fair value estimates and moat ratings for both Berkshire and Wells Fargo in place.

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