Warren Buffett’s Berkshire Hathaway (BRK-A, BRK-B) has just set the table for a new stock buyback. In a press release late Tuesday, the company said that it has amended its policy regarding share repurchases, now allowing for repurchases of Berkshire stock to be made at the discretion of Buffett and vice chairman Charlie Munger so long as both men “believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.” Berkshire Hathaway Chairman and CEO Warren Buffett speaks during an interview in Omaha, Neb. (AP Photo/Nati Harnik) Following this news, shares of Berkshire were up as much as 4%, indicating investors sees the company’s decision to rework its share buyback plan as a sign that repurchases are likely to occur in the months ahead. Previously the company had said it would not repurchase shares unless they traded at less than or equal to a 20% premium to the stock’s book value. As of Tuesday’s close the stock was trading at a roughly 40% premium to its book value. Additionally, the company will not repurchase stock in excess of an amount that would reduce its cash and equivalent holdings to less than $20 billion. In its release Tuesday, Berkshire said no repurchases will be made under this new program until after its second quarter earnings are released after the market close on August 3. In his 2016 letter to Berkshire shareholders, Buffett wrote that, “By our estimate, a 120%-of-book price is a significant discount to Berkshire’s intrinsic value, a spread that is appropriate because calculations of intrinsic value can’t be precise.” Adding, “The authorization given me does not mean that we will ‘prop’ our stock’s price at the 120% ratio. If that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating price with a related goal of not over-influencing the market.” Buffett said in his 2015 annual report that intrinsic value is most simply defined as, “the discounted value of the cash that can be taken out of a business during its remaining life.” In a note to clients published late Tuesday, UBS analyst Brian Meredith said he estimates the intrinsic value — excluding certain qualitative judgements — of Berkshire’s A-shares to be around $361,000. A-shares were trading at around $301,000 on Wednesday morning. Story continues ‘Extraordinary’ liquidity Notably, Berkshire’s announcement comes as Buffett has been very clear in recent years about his desire to use the company’s enormous cash pile on something more productive. In his most recent letter to shareholders, Buffett noted that the company’s holding of $116 billion in cash and equivalent securities provided the company an “extraordinary” level of liquidity that is “far beyond the level Charlie and I wish Berkshire to have.” Buffett added that, “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.” Many saw this line as an indication that Buffett would like to make another major acquisition along the lines of its 2015 purchase of airplane parts maker Precision Castparts for $37 billion. It seems that Berkshire Hathaway’s own stock will at least in part fill this void. In 2011, Berkshire initially put its share repurchase program in place, saying it would repurchase stock when the price fell below 110% of book value. The company repurchased $67 million worth of stock in 2011 before the price moved beyond this threshold. The company amended this program in 2012 to increase the threshold to its former level of a 20% premium to book value. Berkshire has not repurchased any of its shares since December 2012, when it bought back $1.3 billion worth “through a privately negotiated transaction and market purchases.” And though stock buybacks have been roundly criticized as the scourge of post-crisis capitalism whereby managements simply borrow money to prop up share prices and enrich themselves, Buffett has defended the practice as an efficient way to reward shareholders — so long as they are made at the right price. “In the investment world, discussions about share repurchases often become heated,” Buffett wrote in his 2016 letter to shareholders. “But I’d suggest that participants in this debate take a deep breath: Assessing the desirability of repurchases isn’t that complicated. From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market. For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value.” —<doc-sep>OMAHA, Neb. - Berkshire Hathaway's stock price jumped more than 5 percent on Wednesday after it eased restrictions on buying back its own shares. The Omaha, Nebraska, conglomerate led by Warren Buffett said Tuesday that after it posts earnings on Aug. 3, it will begin allowing Buffett to buy stock at prices up to the shares' intrinsic value. Since 2012, Berkshire (BRK.A) has restricted buybacks to prices below 120 percent of the stock's book value, which is an estimate of the company's value after liabilities are subtracted from assets. Given the company's massive cash pile (Berkshire has hoarded more than $100 billion while Buffett looks for another acquisition or investment), the rule change ups the odds that it will be directed at share buybacks. It will not do so if it reduces its cash below $20 billion. Berkshire's class A shares soared $14,710 in Wednesday trading, closing at $303,210.<doc-sep>Bloomberg (Bloomberg) -- Hedge funds often measure their investments in minutes, not decades; but for Anchorage Capital Group, its long-held stake in Metro-Goldwyn-Mayer Studios Inc. is proving that patience can also be profitable.The New York-based money manager stands to make roughly $2 billion on its investment in the film and TV producer, one that began almost 11 years ago with MGM in bankruptcy court. Amazon.com Inc. agreed to buy the company for $8.45 billion Wednesday, a price that includes just under $2 billion in debt.The deal is in many ways a vindication for Kevin Ulrich, the former Goldman Sachs Group Inc. trader who co-founded Anchorage in 2003 and was part of a group of distressed debt investors that took control of MGM as it went through the restructuring process. In recent years the stake looked to be an albatross for the fund, one that came with significant drama in its own right.Ulrich brought in and later fired a high-profile chief executive officer, resisted efforts by activist investor Carl Icahn to take control, and held out for a bigger payday after years of considering various exit strategies. By selling now, as demand for media content from entertainment and technology companies alike is booming, he’s proving his long-held faith in the investment was justified.“There was a lot of maneuvering, a lot of financial engineering,” said Steven Azarbad, chief investment officer at New York’s Maglan Capital, an MGM investor who sold his shares four years ago. “But they’ve done great.”A representative for Anchorage declined to comment.When Ulrich first invested in MGM, he was new to Hollywood. He helped pick Gary Barber, a South African-born producer of films such as “Ace Ventura: Pet Detective” as chief executive officer of the storied but debt-laden studio. Barber brought to the table a shrewd business sense, and connections into a world Ulrich long admired from afar.Barber shepherded MGM’s development of “The Hobbit” franchise, a co-production with Warner Bros., that became a global smash hit. He helmed the release of the James Bond film, “Skyfall,” which generated over $1 billion at the box office, and he revived the studio’s work in television. Barber also brokered a deal to bring on TV super producer Mark Burnett, which gave MGM access to reality show hits like “Survivor” and “The Apprentice,” but would ultimately become personally troublesome.In 2012 the company bought back Icahn’s stock for $590 million. It also filed paperwork for a possible public offering of shares, and considered other options, such as a sale.As Barber boosted MGM’s film and TV pipeline, Ulrich was increasingly entranced by the allure of Hollywood. He became a regular at movie premieres in Los Angeles and New York, and frequented industry parties in the Hamptons and elsewhere. He became active in creative decisions after becoming chair of MGM’s board -- somewhat unusual for a non-executive lacking Hollywood experience -- even getting involved with business granularities like casting.Growing RiftBut over the following years a rift began to open up between Barber and Ulrich. When it was time to renew Barber’s contract in 2017, Ulrich conducted an extensive search for a new CEO. When it ended, he ultimately chose to sign Barber to a new five-year deal. Yet around the same time, the pair split on whether to sell the company, with Ulrich wanting to hang on to the studio and Barber saying it was time to find a buyer.The company would hold buyout talks with Apple Inc. as well as Chinese investors that would ultimately prove fruitless.Only months after renewing Barber’s deal, Ulrich fired him. The shock departure meant the company had to pay Barber for five years of salary and buy out his equity, a package totaling $260 million. In the three years since Barber left, Ulrich hasn’t replaced him, instead operating an “office of the chief executive officer,” comprised of various people that each have their personal vision for MGM.Barber declined to comment via his spokesperson.Bounce BackAfter the initial period of success following the restructuring, the gains became harder to come by, as they did in Anchorage’s overall credit-focused business. Two senior managers left the firm in January 2020, and another in November. Anchorage’s flagship strategy, with about $8.5 billion under management, returned just 0.6% in 2018, 1.5% in 2019 and 4.4% in 2020, according to people familiar with the matter.In December, MGM hired investment bankers for a potential sale.MGM only released one film in theaters in 2020. Its biggest potential hit, the latest Bond film, “No Time to Die,” was pushed from last year to this October as a result of the pandemic.Yet the value of MGM’s library rose as everyone from media companies to technology giants have sought to build video streaming platforms that can compete with industry leader Netflix Inc. Earnings jumped 48% last year, to about $307 million, even as sales declined.Anchorage holds a roughly 30% stake in MGM, worth about $2.5 billion in the sale, said people with knowledge of the matter. Anchorage invested around $500 million in the company more than a decade ago. Including the MGM stake, Anchorage’s flagship fund is up 18% this year, the people added. The fund has gained about 8% in 2021 not counting the studio.More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.<doc-sep>What happened Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) board of directors made a major change to the company's buyback policy. Shares can now be repurchased whenever CEO Warren Buffett and Vice Chairman Charlie Munger agree they are trading at a discount to their intrinsic value. Previously, the board's buyback rule stated that the company could only buy back shares when they were trading for less than 1.2 times their book value. So what Berkshire is sitting on a $108 billion stockpile of cash and equivalents, and this gives Buffett a new way to finally start putting that money to work. Buffett likes to have at least $20 billion in cash at all times, and the new buyback rule prohibits any buybacks that would result in the cash position falling below that level. Even so, this still leaves over $88 billion that is sitting in the bank (or in Treasuries) earning next to nothing that Buffett, as well as Berkshire's shareholders, want to put to work in a more constructive manner. Additionally, by making an effort to allow for more share buybacks, Buffett and Berkshire's board are effectively telling investors that the company's stock could be the best use of investor capital in the current environment. Now what In reference to the former 1.2 times book value buyback threshold, Buffett has said several times that such a valuation represents a substantial discount to the shares' intrinsic value. So, while the methodology Buffett and Munger will use to value Berkshire's stock is a mystery, it's fair to say that this move lifts the threshold valuation significantly. To sum it up, Berkshire has had a cash problem for several years, and this is the first true sign that the problem could finally be addressed.<doc-sep>
Text size Berkshire Hathaway class A shares (ticker: BRK.A) are up 5.4% today, to $304,000, as investors react favorably to the company’s announcement Tuesday to scrap its current cap on share repurchases, paving the way for what could be sizable buybacks. The Berkshire class B shares (BRK.B) are up about 5.6% at $201.15. (Each class B share is worth 1/1,500 of an A share.) Under the new policy, Berkshire can repurchase shares when CEO Warren Buffett and Vice Chairman Charlie Munger both agree that the stock is trading below their estimate of its intrinsic value, conservatively calculated. The stock, which now is up about 1% this year, could extend its gains as investors anticipate a moderate level of share buybacks once the company can begin implementing the new policy after its second quarter earnings release scheduled for Aug. 3. The company is sitting on more than $100 billion of cash and cash equivalents, putting pressure on the 87-year-old Buffett to put that money to use, given his difficulty in finding large acquisitions. The repurchase program is contingent on Berkshire maintaining over $20 billion of cash, which, given the current total, isn’t an issue. Under the old policy, Berkshire’s buybacks were capped at 1.2 times book value, and the company hadn’t repurchased any stock since 2012, as the shares rarely traded below that level. While Buffett has not disclosed his estimate of intrinsic value, many investors and analysts think it considerably exceeds 1.2 times book value. Berkshire now trades around 1.4 times its March 31 book value. JPMorgan analyst Sarah DeWitt called the move a “major positive catalyst” in a note dated Tuesday. She wrote that if Berkshire deploys all of its excess cash, which she puts at $86 billion, it could add 20% to earnings. She has an Overweight rating and a price target of $235 on the class B shares, which is equivalent to $352,500 on the class A shares. “I’m thrilled,” says David Rolfe, chief investment officer at Wedgewood Partners, a St. Louis asset manager whose largest holding is Berkshire. He puts the company’s intrinsic value at around $240 to $250 on the B shares, about 20% above current levels. The new repurchase-program policy also is a signal that Buffett thinks the stock has gotten attractively priced after lagging the stock market this year. Rolfe thinks it’s not coincidental that Berkshire announced the shift in the repurchase program right after Buffett made his big annual philanthropic contribution, which this year involved $3.4 billion of Berkshire stock, to the Bill & Melinda Gates Foundation and other organizations. Before the announcement, the B shares were trading at around $190. “I think it probably drove him crazy that the stock could have been sold below $190 on the B shares,” Rolfe said. He noted that with a price-sensitive Buffett unable to find what he has called “elephant”-sized acquisitions, Buffett may have decided the “biggest elephant is right in Omaha”—Berkshire itself. In a Barron’s article earlier this year, Rolfe recommended the repurchase program policy that Berkshire has since adopted. “Berkshire should buy back stock if it doesn’t have alternatives for the cash and the stock is trading below Buffett’s calculation of intrinsic value,” he argued. In a client note, KBW analyst Meyer Shields outlined various buyback scenarios ranging from zero to $50 billion. (The company’s market value is now approaching $500 billion.) At $50 billion, his 2019 earnings estimate would go up 8.6% to $15,335 per class A share, relative to a base estimate of $14,115, assuming no buybacks. Part of the bull case on Berkshire is that it is benefitting from strength across a range of U.S-focused businesses, including the Burlington Northern railroad. Barron’s has written favorably on the company. It remains to be seen how aggressive Berkshire will be with its buyback program. If the share price continues to rally, Berkshire may be more restrained because Buffett and Munger likely will be price-sensitive. But having the plan in place may help put a floor under Berkshire stock. Write to Andrew Bary at andrew.bary@barrons.com