On Tuesday, Berkshire Hathaway (BRK-A) agreed to purchase $300 million of new debt from Harley-Davidson (HOG), while another Berkshire-like investor, Davis Selected Advisors, purchased another $300 million slug of the same debt offering. Terms of the deal were very attractive, as Berkshire will earn a 15% annual coupon on this paper over the next five years. For Harley, this will provide the company with more liquidity, helping to fund its lending activities in its financial services arm. Harley has been hit hard on two fronts recently, as not only has the current economic weakness hurt demand for Harley’s motorcycles, but the drying up of credit has hurt Harley’s ability to secure funding in the asset-backed securities market. As such, this deal—while expensive—will give Harley a much needed shot in the arm to bolster its financial services unit.
In many ways, this deal is typical Buffett. Harley-Davidson is a well-run company with little debt in its manufacturing operations. What’s more, this is an investment in yet another iconic American brand for Berkshire, which has been typical of Buffett deals as of late—think Anheuser Busch, Wrigley, and General Electric. Since Berkshire is yet again acting as a liquidity provider—or some might say a lender of last resort—it was also able to extract very favorable terms for its shareholders.
You might also be interested to know that this article was featured in a Bloomberg article about this deal on February 4th, which I’ve also linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
