Warren Buffett has often visited Germany in the last few years, and he has also invested Berkshire’s (BRK.A) money in German companies over the years. His main investments were in the Berkshire stronghold of reinsurance, buying Cologne Re (Kölnische Rückversicherungs-Gesellschaft AG), the oldest international reinsurance company in the world. The cooperation between Berkshire subsidiary General Re and Cologne Re in 1994 culminated in a complete takeover by GenRe in 1998, which was finalized in 2009 (after a minority squeeze-out). Since 2010 Cologne Re operates under the name General Reinsurance AG.
Buffett showed his interest in German reinsurance operations again last year, as Berkshire Hathaway bought a 10% stake in market leader Munich Re. With a market cap of $29bn, Munich Re is currently the 13th largest company on the German stock market. Berkshire’s stake in Munich Re is thus worth nearly $3bn, which puts it among Berkshire’s top 10 equity investments (approximately the same size as the stake in Kraft Foods (KFT) or Johnson & Johnson (JNJ)). Interestingly, Warren Buffett seems also to have bought 100,000 shares of Munich Re for his own account (of the 18,899,700 voting rights attributable to Buffett, only 18,799,700 are held by Berkshire Hathaway and its subsidiaries OBH LLC and National Indemnity Company), or a $15m position. It might be small change for one of the world’s richest individuals with a fortune of nearly $50bn, but it is nevertheless interesting since information on Buffett’s personal account is rather scarce (to my knowledge, only Wells Fargo (WFC) is an other known personal holding - except for his Berkshire stock, of course).
The news of Berkshire’s 10% stake in Munich Re has certainly reached all corners of the globe by now, and this is not the company I want to write about.
In June of 2009, a Berkshire subsidiary (Iscar) took a 9.74% stake in a small German tool company traded on the stock market. Berkshire acquired 80% of IMC Group in 2006 for $4bn; the rest is still owned by the founding Wertheimer family. IMC is one of the world's largest multinational conglomerates that manufactures metalworking products. IMC has been expanding in the past years, for example buying the Japanese tool maker Tungaloy at the height of the crisis in September 2008 for around $1bn.
Iscar’s tools are required in the manufacturing centers of the world. In 2007, Buffett personally cut the ribbon to inaugurate a vast Iscar Metalworking production plant in Dalian, China – and proclaimed that “Iscar could become a lot bigger than people imagine." After the Japanese acquisition one year later, Iscar set its sights on Germany, another manufacturing center.
The company IMC was interested in is Kromi Logistics AG (OTC:KROMF). Founded in 1964 as Krollmann & Mittelstädt (KroMi is an acronym made of the surnames of the founders of the company), Kromi converted to a stock company in 2002 and went public on the German market in 2007. Kromi operates as an independent “tool manager” which supplies manufacturing companies with the tools they need. Kromi effectively outsources the tool supply of manufacturers, and has been quite successful in this niche market. From its domestic German base, it expanded to Slovakia, the Czech Republic, Spain and Brazil. Especially the Brazilian subsidiary Kromi Logistica do Brasil has been a very successful venture.
IMC has been cooperating with Kromi since 2008. In 2009, Kromi placed a capital increase of 374,900 shares at 10 Euros per share with IMC. This gave the Berkshire subsidiary a nearly 10% stake in the company for 3.75 million Euros.
With this small size (only one-third of Buffett’s personal investment in Munich Re), Berkshire followers don’t need to be ashamed if they never heard of the deal.
It is nevertheless an interesting one, both for IMC, Berkshire and for Kromi. Iscar can, through its cooperation agreement, increase its presence and visibility with Kromi’s manifold clients – and Kromi secured financing for its international expansion.
Kromi has many of the qualities Berkshire is looking for. It operates in a niche market and is in a strong position and more than 50% of the shares are owned by the management. It has a very strong equity ratio (in excess of 80%) and is reasonably priced at around 1.5 times book value. Kromi’s latest annual report can be found here.
Kromi is currently a strategic holding of Berkshire’s subsidiary IMC, and it is not out of the question that IMC could increase its stake should the opportunity present itself. IMC was certainly keen to get a piece of Kromi in 2009, when it paid a much higher price (10 EUR) than the market was trading at. You can see the jump in Kromi’s share price in June 2009, from below 6 EUR to above 9 EUR. The company’s stock has never traded above IMC’s purchase price, but Kromi paid a 0.15 EUR dividend last year. Some hedge funds and value investors have been buying up stock in the company since Berkshire’s investment: Peter Zaldivar’s Kabouter Management LLC notified a 5.1% stake in September 2010, and German value investors TGV notified a 5.3% stake in September 2009.
Warren Buffett last visited Germany in September 2010. One month later, Berkshire notified it had crossed the 10% shareholding threshold in Munich Re. It will be interesting to see which other company gets his attention when he comes back to Germany the next time. Buffett has been actively promoting the Berkshire model (as opposed to private equity) to many German family-owned companies that are in need of a successor.
Disclosure: I am long BRK.B, KFT.