On February 14, 2013, as I suggested was possible a month earlier, Berkshire Hathaway Inc. (NYSE:BRK.B) announced a joint deal with Brazilian based 3G ventures to buy H.J. Heinz Company (NYSE:HNZ) for $23.2 billion. However, despite this large deal, Buffett has said he is still looking for more acquisitions. I believe Darden Restaurants, Inc. (NYSE:DRI) would be a good fit for Berkshire Hathaway Inc. (NYSE:BRK.B).
One trademark of Warren Buffett’s investing style is that he only buys businesses that are simple and that he truly understands. In terms of private companies, Berkshire Hathaway Inc. (NYSE:BRK.B)’s holdings are focused in a few areas: insurance, retail operations, railroads, construction, and chemicals. Some notable companies owned by Berkshire Hathaway Inc. (NYSE:BRK.B) include GEICO, General Re, Dairy Queen, See’s Candies, Acme Brick, and Benjamin Moore. Berkshire Hathaway Inc. (NYSE:BRK.B)’s two most recent massive acquisitions were railroad operator Burlington Northern Santa Fe and specialty chemical producer Lubrizol. Darden Restaurants, Inc. (NYSE:DRI) meets this criteria as the company that is simple to understand. Darden Restaurants, Inc. (NYSE:DRI), a restaurant company, operates an easy to understand business.
Brands and Moats
Buffett often says that he likes to buy high quality brands and companies with wide competitive moats. Evidence of what Buffett likes to buy can be seen by looking at his five largest stock holdings: Coca Cola, Wells Fargo, IBM, American Express, and Procter & Gamble. All of these companies have something in common: they have highly visible, trusted, and valuable brands. Likewise, DRI is a company with many strong brands including, Olive Garden, LongHorn Steakhouse, Red Lobster, The Capital Grille, and Seasons 52. Combined, Darden Restaurants, Inc. (NYSE:DRI) is the largest full service restaurant company in the world, with more than 2,000 restaurants in total and more than 400 million meals served every year. The reputation of these brands has been built over many years and has created something of a moat for Darden Restaurants, Inc. (NYSE:DRI).
Price & Valuation
Currently, Darden trades at 13.2 times trailing earnings and 12.6 times forward earnings. Based on these numbers, it is difficult to argue that Darden is “dirt cheap”, but Buffett does not necessarily seek out “cheap” investments. Buffett has famously said:
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
In terms of the value of the deal, currently Darden’s current equity value is $5.98 billion and the company has debt of $2.93 billion. So, given a reasonable premium, the total cost of the deal for Berkshire would be likely be close to $10 billion. Prior to the Heinz deal, Buffett said that he was looking for a deal between $20 billion & $30 billion. Berkshire’s investment in Heinz will cost just over $12 billion, so, based on size, Darden would be a nice fit for Berkshire.
Conclusion
Given its simple and easy to understand business, competitive advantage, market leading position, and price Darden is a good fit for Berkshire and a possible target for Buffett. However, my speculation that Darden could be takeover target for Berkshire is not the only reason to consider buying the stock. In addition to its high quality brands and reasonable valuation, Darden also offers a 4.33% dividend yield.
The article Darden Restaurants: A Good Fit For Berkshire originally appeared on Fool.com and is written by Sammy Pollack.
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