Buffett Truck-Stop Deal Is Driven by Bet on Growth -- WSJ

Warren Buffett's conglomerate takes initial 38.6% interest in truck-stop operator

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 4, 2017).

Warren Buffett's Berkshire Hathaway Inc. made a bet on American truckers with a deal on Tuesday to acquire nearly 40% of the operator of Pilot and Flying J travel centers.

The investment in Pilot Travel Centers LLC, better known as Pilot Flying J, is Berkshire's latest wager on traditional forms of transportation and U.S. economic growth. The Omaha, Neb., conglomerate already owns BNSF Railway, auto-dealership group Berkshire Hathaway Automotive, car insurer Geico and private-jet company NetJets.

"There will be more goods moving to more people as the years go by in the United States -- that I would bet a lot of money on," Mr. Buffett, Berkshire's chairman and chief executive, said in an interview.

Pilot Flying J is one of the largest private companies in the U.S. The Knoxville, Tenn.-based family-owned company has 750 locations in the U.S. and Canada, offering truckers a place to refuel, eat and shop.

The company said it generates more than $20 billion in annual revenue and employs 27,000 people.

Pilot has a dominant position in a market with few players, similar to some of Berkshire's other large operating businesses. Regulations and local politics can make it difficult to build new truck stops, even amid high demand, analysts said.

Berkshire didn't disclose how much it paid for its initial 38.6% equity stake in Pilot. The Haslam family will hold a 50.1% stake in the company after the deal closes, and FJ Management Inc., owned by the Maggelet family, will hold an 11.3% stake, according to a news release.

Berkshire plans to buy an additional 41.4% stake in 2023, and the Haslam family would retain 20%, according to the release.

Pilot is the largest operator of truck stops in the U.S., according to analysts, followed by Love's Travel Stops & Country Stores and TravelCenters of America LLC, which has a market capitalization of about $178 million. TravelCenters shares rose 8.4% to $4.50 Tuesday.

The deal runs counter to the long-term growth in electric vehicles and self-driving cars and trucks expected by some analysts. Belief in those businesses has helped Elon Musk's Tesla Inc. post a more than 60% stock-price jump in the past year.

At the same time, the trucking industry is working to become more fuel-efficient, which could reduce demand for diesel and other fuels. Revenue at Pilot has dropped from about $30 billion in 2012 to $20 billion today, as lower crude-oil prices have led to lower prices for diesel and other fuels that it sells, according to the company.

Even so, Pilot's profit has grown in recent years, according to credit analysts.

Federal limits on the time drivers can operate behind the wheel and a new requirement to electronically log hours could help the business by prompting drivers to stop more frequently, increasing the need for parking spots, food and other amenities.

"They make their money on nonfuel stuff" like food and truck servicing, said Bryan Maher, analyst at FBR Capital Markets & Co. "One could see why Warren Buffett might be attracted to this business, especially if you had an optimistic view of the economy."

Jimmy Haslam, Pilot's chief executive, said in an interview that some of the larger trends around electric vehicles and automation still have a long way to go before becoming mainstream and disrupting the truck business.

"We personally believe -- and we spend a lot of time talking to both truck and car manufacturers -- that it will be a long time before there's not a person in the truck," Mr. Haslam said. "I think diesel fuel will power trucks for a long time to come, and there will be a person in that truck for a long time to come."

The acquisition fits into Berkshire's strategy of buying family-owned businesses and leaving the management teams and headquarters in place.

Mr. Buffett has done multistep acquisitions like this before, including with Marmon Holdings Inc., a Chicago-based industrial company owned by the Pritzker family, in 2007. In that deal, the final acquisition price was based on Marmon's performance. Mr. Buffett declined to detail the terms of the Pilot deal but said it was a "reasonable assumption" that it would be structured similarly.

Mr. Buffett was introduced to Mr. Haslam in May by Byron Trott, whom the billionaire investor has praised in the past. Mr. Trott's firm, BDT Capital Partners LLC, owned a small stake in Pilot. Berkshire is an investor in BDT, which exited the Pilot stake as part of Tuesday's deal and advised Pilot in the transaction.

"We weren't actively looking for a partner," said Mr. Haslam, 63 years old. But "the more we talked, the more we felt it made sense." Pilot has made several acquisitions in recent years and plans to continue expanding, he said.

Mr. Haslam's father founded the company and remains chairman. Three third-generation family members work at the company, Mr. Haslam said.

Mr. Haslam's brother, Bill, is governor of Tennessee. Jimmy Haslam and his wife own the Cleveland Browns football team.

Pilot was shaken by a scandal beginning in 2013 when Pilot staff members were accused of defrauding trucking-company customers that bought diesel at its truck stops by skimming rebate money Pilot owed them. Pilot later accepted responsibility and settled with the federal government for $92 million.

Mr. Haslam said the company has resolved the issue.

Berkshire held nearly $100 billion in cash as of June 30, a new high, and Mr. Buffett has been looking for ways to spend it.

Two recent deal efforts fell through. Kraft Heinz earlier this year dropped a $143 billion offer, which would have been partly backed by Berkshire, for Unilever PLC. And Berkshire's utility arm struck a deal in July to buy Texas power-transmission company Oncor, but the deal was terminated in favor of a higher offer from Sempra Energy.

Cara Lombardo contributed to this article.

Write to Nicole Friedman at nicole.friedman@wsj.com

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October 04, 2017 02:47 ET (06:47 GMT)