Buffett’s wish list? We crunched some numbers

Warren Buffett’s war chest is ready for his next deal — maybe even his biggest one yet. The company’s cash swelled to $86.4 billion at the end of 2016, and at this rate it means even takeovers in the $100 billion ballpark are conceivable, as my colleague Noah Buhayar wrote for Bloomberg News this week. He flagged Costco Wholesale Corp. and Nike Inc. as two such megasized possibilities. (Buffett may not strike you as the running-shoe type, but his face has graced pairs of Brooks, a brand owned by Berkshire.)
Buhayar’s piece reminded me that it’s a good time to dust off my screening of potential Berkshire acquisition candidates and lift the cap on deal size. Also, with the company’s annual meeting set to take place in Omaha, Nebraska this weekend, investors will get to pick Buffett’s brain on a variety of things including how he’ll spend Berkshire’s money. Here are the names my refreshed search spit out, plotted according to their returns on equity and balance sheet health.
Why these companies specifically? Buffett used to detail his takeover criteria in his annual letter to shareholders but stopped doing so in 2015. Still, we can probably assume that it hasn’t changed much: large yet simple businesses that he can grasp, with consistent earning power, good returns on equity and little or no debt. My search excludes companies with market values under $20 billion and any banks and financial-service firms, defense contractors, technology makers, health-care providers and companies operating in entertainment-media and advertising spaces, since realistically they’re less likely to appeal to Buffett.
He also prefers companies with very valuable brands that could be around forever, such as the consumer names he owns including Fruit of the Loom, as well as capital-intensive businesses with high returns, such as BNSF railroad. Buffett also has a taste for industrial-products makers with strong competitive advantages, such as Precision Castparts, the aerospace-parts maker he acquired last year.
Three of the airlines that Berkshire built large stakes in during the past few months also have the hallmarks of Berkshire’s targets. There’s Delta Air Lines Inc. and United Continental Holdings Inc., of which Berkshire is the largest shareholder, and Southwest Airlines Co., where it has the second-biggest stake. Airlines have come such a long way since Buffett swore off the industry 16 years ago, United didn’t even have to drag him back.
Another interesting name that made the cut: PepsiCo Inc. I feel pretty confident in saying that Buffett — who got his start selling bottles of Coke door-to-door and is now Coca-Cola Co.’s largest investor — isn’t going to buy Pepsi. However, there has been speculation that Buffett and 3G Capital, which together control Kraft Heinz Co., could team up next on a three-way transaction involving Pepsi, Kraft and Anheuser-Busch InBev (another 3G company). I explained the idea and the caveats to it here last month.
Speaking of 3G, the private equity firm is expected to find another megadeal for Kraft Heinz soon, after early merger talks with consumer-products giant Unilever leaked to the press prematurely. Berkshire has so much cash that it can help bankroll Kraft’s next transaction, while also finding another large company for itself to bring in-house. Even with the minimum $20 billion cash cushion that Buffett likes to keep, there’s no shortage of funds for a 12-figure Berkshire deal. It could sell off equity holdings to raise money (cough, American Express Co.?), or take on debt, as it did to fund part of the Precision Castparts acquisition.
Based on the data, Buffett might take a call from any of these companies. But which one will call him up and name a price? We’ll just have to wait and see.
— Bloomberg