The planned departure of the U.K. from the European Union (EU), popularly known as Brexit, has been a messy affair, with numerous missed deadlines. The current deadline is Oct. 31, 2019. While the looming uncertainties have put a damper on investments in the U.K., Warren Buffett appears to see opportunity. “We welcome the chance to put money out any place where we think we understand and sort of trust the system,” he told the Financial Times in an extensive interview. “We’re never going to understand any other culture or the tax laws or the customs as well as the U.S., but we can come awfully close in Britain," he added.
Brexit-induced anxieties are a factor behind a net £30 billion ($39 billion at the current exchange rate) withdrawal from U.K.-based investment funds during the 12 months through March 2019, according to data from Morningstar Inc. cited in another FT report. Meanwhile, the track record of Berkshire Hathaway Inc. (BRK.A) in the U.K. has been mixed, as summarized in the table below.
A Look at Warren Buffett's Deals in the U.K.
- Investment in supermarket chain Tesco lost 60% of its value between 2008 and 20011.
- The Kraft Heinz Co. (KHC), in which Berkshire has a 26.7% stake, failed in its $143 billion bid to buy Anglo-Dutch rival Unilever NV (UN) during 2017.
- Electric power distributor Northern Powergrid delivers $1 billion of revenues and $300 million of profits annually.
- Berkshire's insurance units are active in London's commercial and wholesale insurance markets.
Source: Financial Times
Significance for Investors
In his letter to shareholders earlier this year, Buffett indicated that Berkshire has plans "to invest significant sums across borders." This would mark a significant change of focus, given that the vast majority of his investments and acquisitions have been in the U.S. until now.
Only one of Berkshire's 10 largest purchases has been outside the U.S., according to financial data provider Refinitiv, as reported by the FT, and that was in Canada. In 2014, Buffett paid $5.5 billion for AltaLink, the largest regulated electric transmission company in the province of Alberta.
Buffett acknowledges that Berkshire and he have significantly less name recognition abroad than in the U.S., and that may hamper their ability to make deals overseas. "If somebody has a private business here [in the U.S.] of size, they think of us if they're going to sell it. In Europe, they know of us but I don't think they necessarily think of us," he told the FT.
A slowdown in takeover activity Europe may present opportunities for buyers such as Berkshire, the FT speculates. Meanwhile, Buffett hopes to find "an elephant-sized acquisition" that would be a profitable use for a big chunk of Berkshire's $112 billion mountain of cash.
However, he has lamented that "prices are sky-high for businesses possessing decent long-term prospects" in the U.S., per his recent letter to shareholders. On the other hand, breaking down the MSCI All-Country World Index (ACWI) by region, the forward P/E ratio for the U.K. is 12.8, versus 17.2 for the U.S., per I/B/E/S data by Refinitiv as of April 25, 2019, and as reported by Yardeni Research.