Warren Buffett is paying a hefty price for the biggest bet of his career as his Berkshire Hathaway Inc (BRKa.N) has agreed to buy Precision Castparts Corp PCP.N, valuing the maker of aerospace and other parts at $32.3 billion.
The purchase is Berkshire's largest, and accelerates its transformation from a company largely dependent on insurance businesses into one resembling the broader U.S. economy, including a railroad, several industrial companies, utilities, a car dealership and consumer goods businesses.
It also joins several recent Buffett forays into unglamorous sectors, including a big stake Kraft Heinz Co (KHC.O) and the pending takeover of the Duracell battery business from Procter & Gamble Co (PG.N).
Berkshire has said it owned 3 percent of Precision Castparts prior to Monday's takeover. Precision Castparts earned $1.53 billion in its latest fiscal year.
"I'm not crazy about paying $30 billion for a $1.5 billion earnings stream of a cyclical company supplying airplane makers," said Jeff Matthews, a principal at hedge fund Ram Partners and author of a book about Buffett. "I'd keep the $30 billion and wait for the next crisis."
Known for buying undervalued and often unloved companies, Buffett acknowledged paying a steep price for Precision Castparts, which has been hurt by falling oil and gas prices.
"This is a very high multiple for us to pay," he told CNBC television.
Berkshire is paying $235 per share for Precision Castparts, which represents a 21.2 percent premium over Friday's closing price, and 17.5 times projected 12-month profit. It valued Precision Castparts at $37.2 billion including debt.
The merger eclipses Omaha, Nebraska-based Berkshire's $26.5 billion purchase in 2010 of the 77.4 percent of the Burlington Northern Santa Fe railroad that it did not already own.
In afternoon trading, Precision Castparts shares rose $37.13, or 19.2 percent, to $231.01. Berkshire's Class A shares fell $522.76, or 0.2 percent, to $214,940.
'CREDIT TO TODD COMBS'
The latest purchase shows how hard it is to move the needle at Berkshire, whose own stock has lagged the Standard & Poor's 500 in the last five years and which on Friday posted quarterly operating profit well below analyst forecasts.
Adding Precision Castparts would boost Berkshire's overall operating profit by less than 10 percent.
It would also give Berkshire ownership of 10 companies that standing alone could be part of the Fortune 500, plus 26.9 percent of Kraft Heinz.
Todd Combs, one of Buffett's investment managers, had begun buying Precision Castparts shares in 2012.
"You've got to give credit to Todd Combs for this deal," said Buffett, who turns 85 on August 30. Buffett has run Berkshire since 1965.
Precision Castparts generates 70 percent of sales by making nuts, bolts and other fittings for the aerospace industry, where booming commercial aircraft demand has led Airbus Group SE (AIR.PA) and Boeing Co (BA.N) to boost production.
But the Portland, Oregon-based company also makes parts for the energy industry, which has struggled as oil prices LCOc1 CLc1 have fallen by more than half over the last year.
Prior to Monday, Precision Castparts' shares had fallen 20 percent in 2015, and the purchase price is below the shares' 52-week high of $249.05 set last September.
Even so, analysts said Berkshire is paying more than 12 times trailing earnings before interest, taxes, depreciation and amortization. That's above the 9 multiple for BNSF, which now generates more than one-fifth of Berkshire's operating profit.
"At the time of his Burlington Northern deal, everyone criticized he paid too high a price," said Ken Shubin Stein, founder of Spencer Capital Management in New York.
Precision Castparts would become a unit of Berkshire, keeping its name and management as well as its headquarters.
"We see a unique alignment between Warren's management and investment philosophy and how we manage PCC for the long term," Chief Executive Mark Donegan said in a statement.
Andrew Carolus, managing director at Mesirow Financial Investment Banking in Chicago, said Buffett is "obviously a believer" in Precision Castparts' prospects "over the next five to six decades."
Brian Reynolds, chief market strategist at New Albion Partners in New York, added that having access to Berkshire's balance sheet could help Precision Castparts do more dealmaking, "which the management has proven they're good at."
Other industrial companies that Buffett has bought in the last decade include toolmaker Iscar, parts maker Marmon, and specialty chemicals company Lubrizol.
Buffett said Berkshire would spend $23 billion of cash to finance the Precision Castparts purchase, and borrow the rest.
While that would leave Berkshire with more than $40 billion of cash, twice the cushion Buffett wants, Buffett said it would be at least a year before he could pursue another "elephant" sized transaction.
Kraft Heinz has proven among his most successful. Buffett has in two years transformed what he has called a $9.5 billion investment in the former H.J. Heinz Co into a Kraft Heinz stake worth roughly $25.5 billion.
The Castparts merger is expected to close in the first quarter of 2016. Credit Suisse and the law firms Cravath, Swaine & Moore and Stoel Rives advised Precision Castparts. The law firm Munger, Tolles & Olson advised Berkshire.
(Additional reporting by Jennifer Ablan, David Gaffen, Greg Roumeliotis and Mike Stone in New York; Editing by Ted Kerr and Nick Zieminski)