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Why Buffett's Excited About This Roadside Buy

Dan Caplinger, The Motley Fool

Warren Buffett's primary mission as leader of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is to find good investments to put his investing capital to work. That's been a struggle for the Oracle of Omaha lately, because it's hard to find deals that both meet the requirements that Buffett has for purchases and are big enough to move the needle at Berkshire's massive operation.

But Buffett did manage to find one company that fit the bill for smart acquisitions, and in his annual letter to shareholders, the Berkshire CEO explained why he's excited about the investment. Although Berkshire didn't fully take over the company, Buffett negotiated provisions to increase his stake in the next five years.

Gas station awning with Pilot logo on it, in front of storefront.

Image source: Pilot Flying J.

Meet "Big Jim" Haslam's Pilot Flying J

Last October, Berkshire Hathaway bought a stake in Pilot Flying J. The partnership is the largest operator of roadside travel centers and truck stops in the U.S., with about 750 locations scattered across North America. The company has about 27,000 employees and is led by Jimmy Haslam, the son of the original founder of the travel center provider.

Family-run businesses are a favorite of Buffett, and his comments about the company are completely in line with his philosophy in seeking out ideal partners for Berkshire. "PFJ has been run from the get-go by the remarkable Haslam family," Buffett wrote, as "'Big Jim' Haslam began with a dream and a gas station 60 years ago." Now, the business has about $20 billion in annual sales, making it an industry leader.

The deal Buffett made

Buffett was able to negotiate an initial 38.6% partnership stake in Pilot Flying J, but he wasn't content to limit his exposure to a minority interest. Over time, Berkshire has an agreement in its purchase contract to increase its stake in the partnership in 2023. At that time, Buffett will own 80% of the business, with the Haslam family collectively owning the remaining 20%.

As is often the case, Berkshire didn't reveal the terms of the deal. However, estimates put the value of the business at just over $9 billion, making the Buffett investment likely to have been in the range of roughly $3.5 billion, with the potential to grow to more than $7 billion in the next five years. That's just a drop in the bucket for Berkshire Hathaway's current cash hoard, but it's still a welcome addition in an environment that simply hasn't had many big elephants for Buffett to target.

Will Flying J's customers fly away?

Some of those who follow Buffett weren't entirely happy with the move at the time. Pilot Flying J's business model relies on a healthy flow of professional drivers of commercial vehicles like tractor-trailers and tour buses, and already, signs of potential disruption in the automotive industry have raised warning signs for trucking. If autonomous vehicle technology eventually advances to the point at which vehicles won't even have to have drivers, much of the market that Pilot Flying J serves could disappear.

That said, Pilot Flying J isn't sitting still. The shift toward alternative fuels earlier in the 2010s spurred the company to make a partnership with Clean Energy Fuels that involved the opening of natural gas refueling stations at strategic points across the nation. If electric-vehicle technology to serve the commercial trucking market takes off in the future, Pilot Flying J has demonstrated an ability to keep up with innovation.

More importantly, Buffett is comfortable taking the risk of a changing future. As he told interviewers shortly after the purchase, "Trucks are going to be around for a very long time," and Buffett seems convinced that any shift toward completely driverless commercial vehicles could be so far in the future that it won't have a marked impact on the value of Pilot Flying J.

Keep on truckin'

When even Warren Buffett has trouble finding good deals, Berkshire shareholders worry. Yet the Oracle of Omaha's discipline in waiting for good pitches remains intact, and Pilot Flying J should join the long list of other Berkshire businesses that make incremental contributions to the insurance giant's long-term success.

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Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Clean Energy Fuels. The Motley Fool has a disclosure policy.