Monday, October 27, 2014

Nebraska Furniture Mart: A Net-Net and 4x Earnings when Berkshire acquired it?

I had either forgotten this valuation or not paid enough attention to it before, but it is pretty interesting. From the book The Snowball:
The Blumkins had never had an audit, and Buffett did not ask for one. He did not take inventory or look at the detailed accounts. They shook hands. “We gave Mrs. B a check for fifty-five million dollars and she gave us her word,” he said. Her word was as good as “the Bank of England.”
Soon after, Berkshire’s auditors conducted the Nebraska Furniture Mart’s first inventory. The store was worth $85 million. Mrs. B, seized with a severe case of remorse after she had sold it for a total value of $60 million, including the share retained by the family, told Regardie’s magazine, “I wouldn’t go back on my word, but I was surprised…. He never thought a minute [before agreeing to the price], but he studies. I bet you he knew.” Buffett, of course, could not have “known,” not literally. But he had certainly known there was a whopping margin of safety in the price.
And while this is probably a pre-tax number, here was a hint at what NFM was making around that time, which occurred after Mrs. B had left NFM to start a competing business, before eventually selling back to NFM:
Some time earlier, Buffett had created a saying. “I would rather wrestle grizzlies,” he said, “than compete with Mrs. B and her progeny.” Stuck wrestling grizzlies, Buffett acted as he always did when any of his friends’ relationships broke down. He refused to take sides. Mrs. B thought that was disloyal. “Warren Buffett is not my friend,” she told a reporter. “I made him fifteen million dollars every year, and when I disagreed with my grandkids, he didn’t stand up for me.”

UPDATE - 10/28/2014

Thanks to Will who was kind enough to point out a 2014 Annual Meeting response from Buffett on the valuation (Q9 in these notes):

Q9: Station 9, Omaha.  Did you buy the Nebraska Furniture Mart at 85% of book value, or 2x earnings?
WB: I wish we had bought it that cheap.  We paid 11 or 12x p/e for 80% of company, and it was not a discount to book, $60m was the equivalent full purchase price, and there was a second transaction involved.  $60m for 100%, was not a bargain purchase, it was more than book at the time.  It would have been a multiple 11x or 12x pre‐tax.  It had $100m sales, pretax 7% margin, or about 4.5% after tax.  That is ballpark.  It was great business, but it was not a bargain.  It was great opportunity to join with this great family. There was another company from Germany trying to buy it at time.  Erskine Bowles was representing them actually.  On my birthday in 1983, in August, I gave a letter to Mrs. B, and Louis her son told her what was in it.  I asked, did she owe any money, did she own building?  No, and yes she did. 
So there's a little discrepancy between that comment and the above excerpt from The Snowball. I guess it can be reconciled a bit if earnings grew quite a bit from the time of Berkshire's purchase until Mrs. B left, and if the inventory was offset by a large accounts payable balance (given that there was no debt and the building was also owned). 


UPDATE 2 - 10/28/2014

Thanks to Jeff for being less lazy than me and digging through Buffett's letters for the info. I thought they didn't break NFM out until later, but Jeff was kind enough to bring it to my attention. 

It appears that NFM averaged just a bit over $15 million per year pre-tax in the 3 years after Berkshire purchased it in 1983. And given that it still made $3.8 million in the last 3 months of 1983 when Berkshire owned it, NFM probably also made close to $15 million or so in 1983 as well, maybe a bit less. So it does appear that Berkshire did in fact pay about 4-5x pre-tax (and about 8-9x after-tax) for the business.