SMITH BRAIN TRUST — Why might Warren Buffett be interested in Sprint? The question emerged from an annual gathering of CEOs in Sun Valley, Idaho, last weekend.
Sprint Corp. Chairman Masayoshi Son engaged two of America's richest men, billionaire investor Warren Buffett and cable mogul John Malone, about investing in Son's embattled wireless company. One possible outcome, according to The Wall Street Journal: Buffett's Berkshire Hathaway would invest $10 billion.
Sprint is losing money and is saddled with more than $32 billion in debt, notes David Kass, clinical professor of finance at the University of Maryland's Robert H. Smith School of Business. And in recent months, Sprint has held merger talks with rival T-Mobile, and has discussed a potential reseller agreement with cable providers Charter Communications and Comcast, as well as the possibility of selling a stake to them.
At first glance, it would not appear that telecommunications is within Buffett's "circle of competence," Kass says.
However, he adds, Buffett's portfolio managers, Ted Weschler and Todd Combs have previously invested in the sector. "Weschler has been a longtime investor in John Malone's companies and has a good understanding of the economics of the telecommunications industry, which includes Berkshire Hathaway's current investments in Charter Communications and Liberty Global," Kass says. Prior to joining Berkshire in 2012, Weschler held a large position in John Malone's Liberty Media for many years in his hedge fund, Peninsula Capital.
Similarly, DirecTV was a John Malone investment that Weschler owned in his hedge fund, and subsequently both Weschler and Combs purchased shares for Berkshire. And Kass further reminds that DirectTV was later acquired by AT&T, resulting in large profit for Berkshire. Weschler and Combs subsequently sold the shares they received in wireless provider AT&T, as well as shares in Verizon.
So why would Berkshire be interested in wireless provider Sprint that is substantially less profitable than the other two leading wireless providers?
"One possibility is the opportunity to partner with John Malone, who has a history of maximizing shareholder value by spinning off assets held by his companies or issuing tracking stocks," Kass says. "For example, Berkshire currently holds the tracking stock for John Malone's Liberty SiriusXM Group, along with the underlying common stock of SiriusXM Holdings that it also invested in."
"Mr. Malone is considered to be the most knowledgeable and successful investor in the telecommunications industry, Kass adds. "An investment in Sprint would be very appealing if Weschler and/or Combs recommend it."
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