Soft Landing: Berkshire Hathaway Completes 80% Acquisition of Pilot
"We've been a growth company from the get go."
Happy Tuesday and welcome to our new subscribers!
So far, Berkshire Hathaway has kept its cards pretty close to the vest in 2023.
Warren Buffett played his greatest hits in his shorter-than-usual annual letter, the company’s 10-K mostly went to form, and we haven’t even gotten any juicy SEC filings of current year activity to overanalyze.
Yet all is not lost.
Buffett and co. have quietly made at least one move of actual consequence in the new year — paying $8.2 billion for an additional 41.4% of Pilot to give Berkshire majority ownership of the sprawling truck stop and travel center network.
Berkshire now owns 80% of Pilot, with the Haslam family hanging onto the remaining 20% and pledging to stay involved with the company that they founded.
Just how Warren Buffett likes it.
Let’s take a closer look at how this deal came together and what it might mean for Berkshire Hathaway’s future…
How did we get here?
In 2017, Forbes ranked Pilot as the fifteenth largest private company in America. It operated a vast network of truck stops and service centers across the United States and Canada — with a dominant market position, a powerful brand name, loyal customers, and widely-diversified business lines including fuel, retail, and food.
Boring, but profitable.
In other words, right up Warren Buffett’s alley.
But the man who got the ball rolling on this particular deal was Byron Trott.
Byron Trott is the (very) rare investment banker that Buffett trusts. His BDT Capital Partners also owned 5% of Pilot. In May 2017, Trott introduced Buffett to Pilot CEO Jimmy Haslam — and the two began to hammer out a deal for Pilot to join the Berkshire family.
On October 3, 2017, white smoke finally rose above Omaha. Berkshire agreed to initially purchase a minority stake (38.6%) in Pilot, before boosting it to 80% in 2023.
Buffett and Haslam sat down with CNBC’s Becky Quick to discuss the deal. Below are a few relevant excerpts from that 2017 interview.
Why Pilot?
Haslam: Like a lot of companies that Warren has bought, it’s a family-owned, family-run company. It was started by my dad in 1958 with one gas station. We’ve changed over the years … and we’re now a huge distributor of fuel gasoline and diesel fuel. We sell more diesel fuel over the road than anybody in the United States.
It’s [also] a big logistics company. Every 22 seconds, we drop a load of petroleum somewhere in the United States or Canada at one of our stops. We’re also a food company. We’ll sell over $1 billion in food and $2 billion retail this year.
Why sell to Berkshire?
Haslam: Long-term investor. Hands-off. I think I’m right, Warren, that of the companies you’ve bought — not equities — I don’t think you’ve ever sold one. Is that right?
Buffett: That’s right. Yeah.
Haslam: He truly wants us to run the company, wants us to maintain the culture. If there is an opportunity to grow the company substantially, he’s got plenty of capital. So it’s just a marriage that we thought makes a lot of sense.
Buffett: Jimmy’s based in Knoxville and we bought another company in Knoxville fourteen years ago, Clayton Homes. Their employment has gone from 5,000 to 16,000 and they’ve seen me exactly once. They might have done better if I hadn’t gone down the one time.
Haslam: (Laughs)
Buffett: But the [Haslam and Clayton] families know each other, so they’ve had a chance to check and see how much we really do interfere with operations. The truth is I wouldn’t know how to build a manufactured home or a travel center. We depend on management.
Why the two-step purchase process?
Buffett: [Pilot’s] situation, in terms of their family and their partnership and everything, made this logical. We’ve had other two-step arrangements. Marmon, with the Pritzker family, we had a three-step arrangement. We try to fit what the seller would like and, with families and everything, you’re going to have different arrangements.
It’s that flexibility and outside-the-box approach to dealmaking that makes Berkshire such an attractive home for family- and founder-run businesses.
Long may that continue.
Under the Berkshire Umbrella
After Warren Buffett and Jimmy Haslam shook hands on the two-step deal, the Berkshire Hathaway chief went straight into salesman mode.
In his 2017 annual letter, Buffett wrote: “When driving on the Interstate, drop in. PFJ (Pilot Flying J) 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.”
He also honored the company with a special shoutout in 2020 as part of his ode to the economic importance of Middle America. There, Buffett revealed that Pilot had achieved annual pre-tax earnings of more than $1 billion.
But, other than those occasional mentions in annual letters, details on Pilot’s performance have been frustratingly scant. Berkshire does not typically spill much ink on its equity method investments in 10-Ks — and Pilot is no exception.
For example, here’s what we learned about the company from Berkshire’s recently-released annual report:
Pilot sold over 13 billion gallons of fuel in 2022 (primarily diesel and gasoline).
Pilot’s top ten customers for diesel sales account for less than 15% of total diesel gallons sold by Pilot. Likewise, Pilot’s top ten fuel suppliers account for less than 50% of gallons purchased by Pilot.
Berkshire’s equity method earnings increased by $724 million in 2022 — and $267 million of that increase came from Pilot.
And that’s about it.
We get enough breadcrumbs to infer that Pilot is performing well — increasing earnings by a substantial amount year over year — but not enough to reach any hard-and-fast conclusions beyond vague generalities.
But that may be about to change.
With Berkshire now the majority owner of Pilot, we should get a better peek under the hood at its operating performance in future 10-Ks. Pilot will no longer be accounted for via the equity method, but will now be included in Berkshire’s Consolidated Financial Statements going forward.
As such, it should get fuller and more detailed commentary like Berkshire’s other owned subsidiaries. Pilot will be slotted into the Manufacturing, Service, and Retailing segment alongside the likes of Precision Castparts, Marmon, Lubrizol, International Metalworking Companies, Clayton Homes, and more.
Berkshire devotes multiple paragraphs of discussion — complete with revenue and earnings figures — to each of those companies in its 10-K. Fingers crossed that Pilot gets similar treatment in 2023.
Where does Pilot go from here?
No doubt, Pilot is just the type of boring, unglamorous business that Warren Buffett loves to own. But, like so many of his best investments, a hidden growth story also lurks beneath the surface.
In fact, Pilot’s vast network of truck stops and travel centers — which provide food, fuel, and showers to weary travelers from coast to coast — could become the framework of an immense EV (electric vehicle) charging system.
One of the biggest challenges facing the EV industry is that current battery technology limits most use-cases to local driving only.
Pilot admits that third-party research shows that “widespread access to highway charging … is a significant barrier to mass EV adoption”. So, with its expansive network of travel centers across the country, Pilot could eventually become an integral piece of our EV future.
CEO Shameek Konar, who succeeded Haslam in 2021, wasted no time in putting this ambitious vision for Pilot’s future into action:
Last year, Pilot partnered with General Motors to create a national network of 2,000 EV charging stations (open to all EV brands) in 500 U.S. locations by 2026.
Pilot also signed a letter of intent with Volvo to create a nationwide public charging network for battery-powered electric trucks.
Along similar lines, the company entered into a strategic agreement with Kodiak Robotics to develop services for self-driving trucks. Pilot and Kodiak are currently building the first autonomous truck-port near Atlanta, Georgia.
Pilot also announced the $1 billion “New Horizons” initiative to remodel and modernize over 400 of its travel centers over the next three years. This includes installing self-checkouts, updating restrooms and showers, expanding kitchen and dining areas, improving driver-focused amenities, and expanding digital engagement with guests.
“We’ve been a growth company from the get go,” Haslam said in 2017. “We have a pretty large market position now, but we’re always looking for opportunities to grow.”
Maybe it’s just me, but there’s something charming (and funny) about an unfashionable business like truck stops becoming the backbone of our future EV infrastructure. Godspeed, Pilot.
The charging angle is very interesting. People will have to do something for the 30-60 minutes the car is charging. So they’ll buy food and other merchandise with relatively high margins.
Good stuff, Kevin. Thank you!