Warren Buffett
has long championed
Berkshire Hathaway
as the best home for sizable private companies seeking a buyer, saying that the conglomerate would treat them like fine art and never sell them, a contrast with more rapacious private equity purchasers.
So it comes as a surprise that truck-stop operator Pilot is suing Berkshire Hathaway (ticker:
BRK.B
), claiming that Buffett’s company is using accounting adjustments to potentially shortchange the family that formerly controlled it.
Knoxville-based Pilot was owned by the Haslam family until it sold an 80% stake to Berkshire Hathaway in two stages in 2017 and early 2023 for a total of $11 billion, with $8.2 billion paid in the second tranche for 41.4% of the business.
It was Berkshire’s largest purchase of a private company during Buffett’s 62 years at the helm.
The Haslam family, which also owns a majority stake in the Cleveland Browns pro football team, now holds 20% of Pilot, and the suit involves a dispute about how to value that remaining interest. The family has the right to sell that 20% Pilot stake to Berkshire Hathaway starting on Jan. 1, 2024, for a 60-day period under what’s known as a put agreement.
Pilot suggests a fair price for the remaining 20% is around $3.2 billion, the same valuation that Berkshire Hathaway assigned to the remaining stake in its second quarter 10-Q.
But Pilot alleges in its lawsuit filed in Delaware last week that Berkshire Hathaway is positioning itself to pay less by changing the accounting for Pilot’s financial results without its consent.
Berkshire Hathaway didn’t respond to a request for comment.
Berkshire Hathaway shifted Pilot’s accounting from historical to so-called pushdown accounting in March 2023. Such a change is entirely appropriate, says New York accounting expert Robert Willens who says it’s commonly done by buyers after acquisitions.
The issue is whether Berkshire Hathaway could do so without Pilot’s approval. Pilot says its purchase agreement with Berkshire Hathaway precludes that.
The new accounting results in lower reported earnings, and thus a lower price for the 20% stake under the formula that Berkshire Hathaway has used for buying Pilot—10 times annual earnings before interest and taxes, which is known as Ebit.
The accounting change would “justify grossly underpaying” for the remaining 20%, Pilot states, with the estimated amount of underpayment redacted in the publicly available lawsuit document.
The change to pushdown accounting results in the creation of significant noncash amortization and depreciation that depresses reported earnings but “does nothing to change the value or performance of PTC’s business,” the suit states. PTC refers to Pilot Travel Centers.
The suit seeks to compel Berkshire Hathaway to change Pilot’s accounting or at least use more favorable historical accounting for the purpose of valuing the 20% stake.
Pilot also is seeking an expedited ruling from the Delaware Chancery Court because the 60-day period during which it can sell that stake starts on Jan. 1, 2024. The company earned $186 million before taxes in the second quarter using the new accounting method, according to Berkshire Hathaway’s second quarter 10-Q.
With annualized revenue of about $60 billion from some 750 truck stops nationwide and other businesses, Pilot was one of the largest acquisitions made by Berkshire Hathaway, and was one of the biggest privately owned business in the country.
The suit names Berkshire Hathaway Vice Chairman Greg Abel, Buffett’s heir apparent as CEO, as well as four other executives at Berkshire Hathaway who are on the seven-member Pilot board.
After the family was rebuffed by Abel, who was installed as the chairman of Pilot in March, Pilot’s 92-year-old founder, Jim Haslam, spoke directly to Buffett by phone in mid-October in an effort to resolve the matter but was unsuccessful, the suit says.
“After Berkshire’s Chairman, Warren Buffett, informed the elder Haslam in an October 13, 2023 phone call that Berkshire would abide by the LLC Agreement, the elder Haslam sent Buffett a letter seeking confirmation that Berkshire would not apply pushdown accounting in calculating the value of Pilot’s Put Right. Buffett refused to provide a straight answer to Haslam’s simple question,” the suit says.
Berkshire Hathaway is the country’s largest conglomerate with a market value of $770 billion, and it has grown over the past few decades by purchasing public companies such as Burlington Northern Santa Fe railroad, Precision Castparts, and insurer Alleghany, as well as a group of private companies including TTI, an electronics distributor. Berkshire Hathaway also has a roughly $350 billion equity portfolio.
Buffett and Vice Chairman Charlie Munger have positioned Berkshire Hathaway as a benevolent acquirer of private companies that often leaves management in place, doesn’t slash costs and jobs, and holds the businesses indefinitely. Berkshire Hathaway is decentralized with the company historically doing little meddling at subsidiaries.
Buffett has been quoted as saying: “You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever.” He contrasted that with the approach of private equity, which he likened to a “porn-shop operator.”
The Haslams were eager to sell to Berkshire. “Because of their respect for Berkshire, the Haslam family chose to engage seriously only with Berkshire as a possible acquirer of PTC (Pilot),” the suit states.
The suit could make private businesses less willing to sell to Berkshire Hathaway. One issue is that sellers know that Buffett won’t be around indefinitely, and that they will need to deal with his likely successor, Abel, who has taken a more assertive approach to running Berkshire Hathaway’s subsidiaries than Buffett.
In a CNBC interview earlier this year, Buffett said: “Our managers like autonomy, but they also get lonesome. I give ‘em the autonomy, but Greg gives ’em both [autonomy and supervision], and he gets somewhat more discipline out of the managers with our hands-off-type operation. He gets more discipline than I would get.” When asked if it was a “good-cop, bad-cop” situation with himself and Abel, Buffett said “No.”
Pilot could find support for its position from Buffett’s own words. In his 2015 annual letter, Buffett wrote that he thought it was appropriate to exclude certain noncash amortization from acquisitions when evaluating Berkshire Hathaway’s financial results.
Companies regularly report adjusted earnings excluding the amortization expense because it’s a noncash expense under GAAP—generally accepted accounting principles—but often not a true economic expense.
Write to Andrew Bary at [email protected]
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