Warren Buffett is well-known for saying that he is not a big fan of technology stocks. The billionaire investor has mentioned time and time again that he looks for “businesses in which I think I can predict what they’re going to look like in 10 or 15 or 20 years,” and the tech sector does not meet these criteria.
With that out of the way, why does Berkshire Hathaway and Warren Buffett owned a large position in DirecTV, the satellite TV provider?
Berkshire Hathaway 2.0
To put it bluntly, Warren Buffett did not choose the stock. A few years back, Charlie Munger and Warren Buffett – 90 and 84 years old respectively – felt that it was important to start bringing in new portfolio managers, so they brought in Ted Weschler and Todd Combs. Not long after being hired, both of these gentlemen began making large-scale stock purchases for Berkshire Hathaway.
The first of these purchases was to buy shares of DirecTV, and it has become a very large position. In November 2011, Berkshire Hathaway first revealed that they took up the position. And at the end of last year, shares had peaked at 36.5 million. Buffett and company have sold off pieces of this position since then, and at this time they currently own 23.4 million shares of the satellite giant.
When compared to Warren Buffett, Weschler and Combs are low-profile and do not make many public announcements or give many interviews. Also, Warren Buffett has not mentioned this stock all that often in the annual letters to shareholders, probably because he did not choose it himself.
So it’s difficult to figure out exactly why the brain trust at Berkshire Hathaway decided to purchase DirecTV. No doubt, the stock has many aspects that make it quite appealing to value investors like Combs, Weschler and Warren Buffett himself.
A Very Large Moat
As far as publicly traded satellite-TV providers are concerned, two companies pretty much occupy the entire space – Dish Network and DirecTV.
But when comparing the two, DirecTV is the much larger company as far as subscriber base, market capitalization and revenue are concerned. Lately, it even has the edge as far as bottom-line profitability goes. It has posted much wider net margins when compared to rival Dish Network.
DirecTV even has large operations in the big markets of Latin America. Unlike the United States, which is currently saturated with TV providers, countries south of the United States are still part of a growth industry, and the subscriber count at DirecTV has more than quadrupled since the year 2007.
DirecTV does not have rosy financial figures across the board though. It is expensive to operate satellites, and the long-term debt of the company has reached over $18 billion. That number is actually more than twice its quarterly revenue, and consists of 83% of the company’s total liabilities.
Big Profits Anyone?
But for a large company, the positives at DirecTV exceed the negatives by a wide margin. The company we are speaking about is AT&T, the telecom giant, which recently in May had announced a deal in order to purchase DirecTV for more than $48 billion with a mix of stock and cash. AT&T will assume the net debt of DirecTV as well.
The stock at DirecTV saw a large boost of 12% after the announcement was made. As of now, the buyout has not passed key regulatory hurdles at the Federal Communications Commission for approval, so investors are still somewhat wary. At this time, shares in DirecTV trade $10 below the $95 per share purchase amount according to the deal that was made.
This is already a huge windfall for Berkshire Hathaway regardless of how it goes. During the fourth quarter of 2011, when Berkshire bought the majority of its stake in the company, shares traded for around $42-$47. When Buffett and company sold off a big portion of their stake during the second quarter of this year, it was selling for $74-$88 per share, right around the time that AT&T made its announcement.
That is a massive difference, and when you multiply it by the 11 million or more shares that Berkshire Hathaway unloaded, it’s plain to see that it was a nine figure payday.
More of This on the Horizon
The AT&T purchase of DirecTV will most likely get the okay from regulators at the Fed. Although there has been a recent wave of consolidation – more notably the Time Warner/Comcast cable merger – but enough competition still remains that the market for broadcast TV should not fear dominance by one particular group of providers.
What does this mean? For Berkshire Hathaway, it means that it will most likely make much more money from the remaining 23,000,000+ shares that it owns of DirecTV, as the stock continues to rise toward the full buyout price. Once again, Berkshire Hathaway finds itself in front of a large payday. Buffett may not love the entire class of tech stocks, but we can certainly assume that he’s enjoying the returns produced by DirecTV as well as the possible future gains that he looks to make in a relatively short period of time.