Buffett Makes a Rare -- but Intelligent -- Exit

U.S. stocks ended the day roughly unchanged on Tuesday, with the benchmark S&P 500 index up 0.03%, while the narrower Dow Jones Industrial Average fell 0.07%. Last month, I highlighted that Berkshire Hathaway was in discussions to unwind its four-decade relationship with Graham Holdings (and its predecessor, The Washington Post Company). Under the proposed structure, Berkshire would exchange all (or most of) its Graham Holdings stock for an "as yet unformed subsidiary" that would house a business and assets from Graham Holdings' portfolio. Today, Berkshire filed a form with the Securities and Exchange Commission that reveals what Graham Holdings is contributing to the swap: WPLG, a Miami television station, along with nearly all of its Berkshire "B" shares and $328 million in cash.

In reporting the story, CNBC.com is carrying the headline "Buffett's Berkshire gets its first TV station." That may well be true if we are referring strictly to Berkshire's operating subsidiaries. However, Buffett is not unfamiliar with this industry -- let's not forget the $518 million investment he made in Capital Cities' shares after its takeover of ABC in 1985. That gave Berkshire an 18% stake in the merged company, Capital Cities/ABC, and Buffett a seat on its board. (Capital Cities/ABC was acquired a decade later by another one of Buffett's favorite companies, the Walt Disney Company.)

Is Buffett getting a steal here? Given the longevity and nature of the relationship he has enjoyed with The Washington Post Company and the Graham family, I believe that he is treating Graham Holdings fairly. In the press release announcing the deal, Buffett offered a statement according to which he is "sure this is a mutually beneficial transaction for both companies."

Mutually beneficial, perhaps; equally beneficial, no. Buffett didn't become the world's third richest man by not looking out for No. 1; here are two winning aspects of the deal for Berkshire and its shareholders:

• The operating business: WPLG is a solid media property. In the November ratings period, it was ranked second among Anglo stations in Miami (it was tied for first place a year earlier).
• The stock swap: In contributing Berkshire's Graham Holdings shares, Buffett is effectively paying with a currency that looks somewhat overvalued. In exchange, he is receiving Berkshire shares, which are currently undervalued (or no worse than fairly valued, at the very least). Furthermore, the long-term business prospects of Berkshire Hathaway are superior to those of Graham Holdings.

Graham Holdings' prospects are certainly much better than those of the Berkshire's textile operations when Buffett ultimately decided to shutter it. Nevertheless, this looks like an intelligent exit from a business association that Buffett had maintained through roughly four-fifths of Berskhire Hathaway's existence.