Warren Buffett, the billionaire who’s poured cash into some of the biggest US brands including Coca- Cola Co. and Mars Inc., agreed to buy $300 million of debt issued by motorcycle-maker Harley-Davidson Inc.
Berkshire Hathaway Inc., the insurer run by Buffett based in Omaha, Nebraska, will add Harley-Davidson’s senior unsecured notes — and their 15 percent annual interest payment — to his collection of at least $85 billion in corporate debt and stock. The deal, announced by Milwaukee-based Harley-Davidson on Wednesday in a statement, is one of a half-dozen since the start of 2008 in which Buffett has made a new investment in a US business icon.
Buffett, 78, has said he prefers investing in firms with a powerful competitive advantage such as a well-known brand. With the global credit crunch cutting off other sources of cash, Berkshire can demand interest rates of 10 per cent or more. His company committed $6.5 billion in April to help Mars buy chewing gum maker Wm Wrigley Jr Co, and $8 billion for preferred shares of General Electric Co and Goldman Sachs Group Inc.
“It’s a classic Buffett move,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site. “He’s getting a very attractive yield from a great business that, in this environment, probably would have a very hard time finding financing anywhere else. He’s like an oasis in the desert for them.”
Neither Harley Chief Executive Officer Jim Ziemer or Tom Bergmann, the company’s chief financial officer, were immediately available to discuss Berkshire’s investment, which may be used to help customers finance their purchases.
Stock Jumps: “To our knowledge, this is Berkshire’s first significant involvement with the company,” Harley spokesman Bob Klein said in an interview.
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The stock — traded under the ticker HOG after the nickname used by riders — rose 16 per cent in New York Stock Exchange composite trading, mirroring the movement of companies including General Electric and Kraft Foods Inc that jumped after winning Buffett’s endorsement.
Harley gained $1.87 to $13.73 at 4:15 pm and rose as much as 23 percent during the session, its biggest advance since October, 1987. The motorcycle maker has lost about two-thirds of its market value in the past year. Berkshire, the most expensive stock on the Big Board, added 1.2 percent to $90,500.
The company is the world’s largest seller of cruisers, or motorcycles designed for leisure riding, that come equipped with chrome exhaust pipes and 1950s styling. The power of its brand also allows it to sell T-shirts and memorabilia, and a chain of restaurants carries the Harley-Davidson name.
Harley’s Moat
“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Buffett wrote in his annual letter to shareholders last year, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”
Ziemer has said the motorcycle maker, founded in 1903 by William Harley and brothers Arthur, Walter and William Davidson, is “fiercely protective” of its brand. In the 1990s Harley unsuccessfully tried to trademark the sound of its V-Twin engines, described in an application as a “syncopated rumbling exhaust” that sounded like “potato” repeated quickly.
Davis Selected Advisers LP, the largest holder of Harley- Davidson stock, also committed to buy $300 million of debt. The firm’s Chris Davis declined to comment. Buffett, who is Berkshire’s chairman and chief executive officer, didn’t respond to a request left with assistant Carrie Kizer.
Corporate Debt
Buffett is adding holdings of fixed-income securities to help deploy more than $30 billion in Berkshire’s cash. The firm held about $9.7 billion in corporate debt and redeemable preferred stock at its insurance units as of Sept. 30, an increase of 61 percent from a year earlier. In November, Buffett agreed to buy $300 million in debt from USG Corp., North America’s largest maker of gypsum wallboard.
“He’s got cash coming in faster than most people would have a ready place to put it.” said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “This economy is certainly providing him with opportunities,”
Average yields on corporate bonds with BBB ratings jumped to 9 percent yesterday from 6.1 percent a year ago, according to Merrill Lynch & Co.’s U.S. Corporates, BBB Rated index. They reached a 17-year high of 10.2 percent on Oct. 31 as a global credit crisis made buyers of corporate debt scarce.
Harley said Jan. 23 fourth-quarter profit fell 58 percent due to weaker demand for its motorcycles. The net income of $77.8 million, or 34 cents a share, was the lowest quarterly profit in nine years.
Fat Boy
Sales for the maker of Fat Boy and other cruisers fell in 2008 as the U.S. economy slowed and access to consumer credit tightened. List prices for Harleys range from $6,999 to $35,499.
Harley is working to cut 1,100 jobs and close three plants to save at least $60 million a year. About 70 percent of the firings will take place this year and the rest in 2010, the company said.
“Buffett looks beyond the quarterly earnings report,” Fuller said. “When he invests in a company, it’s a way for shareholders to know that they’ll make it through. It’s a real pat on the back for Harley-Davidson, and a sign that he thinks they’ll be around for another 100 years.”
To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net ;
Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net