What Made Pilot Flying J Buffett’s ‘One Sensible Purchase’?
By Greg Lindenberg on Feb. 27, 2018UPDATE: Berkshire Hathaway paid $2.76 billion for its 38.6% stake in Pilot Travel Centers LLC, according to an insurance filing cited by Bloomberg. Berkshire didn’t disclose the purchase price when it announced the deal in October, and it hasn’t revealed the figure in subsequent reports to the U.S. Securities and Exchange Commission.
OMAHA, Neb. -- “The CEO job self-selects for ‘can-do’ types,” said Warren Buffett, chairman of Berkshire Hathaway Inc., in his always-anticipated annual letter to shareholders, in which he criticized overzealous acquisition but singled out for praise the holding company’s investment in truckstop network Pilot Flying J.
“If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase,” said Buffett, known as the Oracle of Omaha, of the “purchasing frenzy” evident in 2017 acquisition activity.
“Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large ‘synergies’ will be forecast. Spreadsheets never disappoint,” he said.
Nevertheless, Buffett said, “we were able to make one sensible stand-alone purchase last year, a 38.6% partnership interest in Pilot Flying J.”
With more than 750 truckstops in the United States and Canada, most in the United States, Knoxville, Tenn.-based Pilot Flying J came in at No. 9 in a year-end update of CSP’s Top 202 ranking of U.S. convenience-store chains by size.
Here’s Buffett take on Pilot Flying J …
The buy
In October 2017, Berkshire Hathaway and Pilot Flying J announced a significant minority investment in Pilot Travel Centers LLC, doing business as Pilot Flying J. Berkshire Hathaway has acquired a 38.6% equity stake in the travel-center company.
The Haslam family continues to hold a majority interest, with 50.1% ownership in the company, and FJ Management Inc., owned by the Maggelet family, will retain 11.3% ownership until 2023. Then, Berkshire Hathaway will become the majority shareholder by acquiring an additional 41.4% equity stake, and the Haslam family will retain 20% ownership in the company and remain involved with Pilot Flying J.
Jimmy Haslam will remain as CEO. Pilot Flying J President Ken Parent and the company’s management team will also remain in place, according to the agreement.
The why
"The company has a smart growth strategy in place, and we look forward to a partnership that supports the trucking industry for years to come,” Buffett said of Pilot Flying J when the companies announced the investment.
“With about $20 billion in annual volume, the company is far and away the nation’s leading travel-center operator,” he said Feb. 23 in his letter to shareholders. “PFJ has been run from the get-go by the remarkable Haslam family. ‘Big Jim’ Haslam (above right) began with a dream and a gas station 60 years ago. Now his son, Jimmy (above center, next to Bill, left)), manages 27,000 associates at about 750 locations throughout North America. Berkshire has a contractual agreement to increase its partnership interest in PFJ to 80% in 2023; Haslam family members will then own the remaining 20%. Berkshire is delighted to be their partner. When driving on the interstate, drop in. PFJ sells gasoline as well as diesel fuel, and the food is good. If it’s been a long day, remember, too, that our properties have 5,200 showers.”
The how
“Pilot Flying J continues to be humbled and honored to have such a great partner in Warren Buffett’s Berkshire Hathaway," CEO Jimmy Haslam said in a statement provided to CSP Daily News. "They share our commitment for the future of Pilot Flying J and believe in our strategy, support our team and are excited to see Pilot Flying J grow. Our vision and values are at the heart of everything we do--something we share with Berkshire Hathaway. They understand and recognize our success in continuing to build Pilot Flying J into an industry leader, ensuring we remain a great place to shop and a great place to work.”
Pilot Flying J became the nation’s largest operator of truckstops and the largest seller of diesel fuel to over-the-road truckers after the merger of Pilot Travel Centers and Flying J in 2010.
Catering to professional drivers and traveling motorists across the country, the company’s travel centers offer c-stores and a wide variety of quick-service restaurants (QSRs), along with amenities such as fueling stations, showers, Wi-Fi and ATMs.
The company recently hired restaurant-industry veteran Shannon Johnson as its new vice president of food innovation. He previously was chief food-innovation officer for KFC and product-innovation director for McDonald’s. The hire fuels Pilot’s fast-casual PJ Fresh Marketplace brand, the company said.
The focus is part of the company’s $485 million five-year modernization and expansion plan.
- Click here for more details about Pilot Flying J.
Other highlights
Buffett’s annual letter to shareholders (click here to read the full 2018 letter) is always a treasure trove of investment advice and M&A insights. Some highlights of the 2018 letter:
- “In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”
- “Our aversion to leverage has dampened our returns over the years. But [Berkshire Hathaway Vice Chairman Charlie Munger] and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
- “Despite our recent drought of acquisitions, Charlie and I believe that from time to time, Berkshire will have opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
- “Berkshire’s gain in net worth during 2017 was $65.3 billion. … [But] 2017 was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire. The $65 billion gain is nonetheless real—rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.”
Omaha, Neb.-based Berkshire Hathaway and its subsidiaries engage in diverse business activities including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services.
Its convenience-store and petroleum-industry-related subsidiary companies include International Dairy Queen Inc., Minneapolis; Kraft Heinz Co., Chicago; and McLane Co. Inc., Temple, Texas. The company also has investments in The Coca-Cola Co., Atlanta; and Phillips 66 Co., Houston.