More Praise for The Warren Buffett Way, First Edition

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Figure 8.2
Common stock price of the Gillette Company compared to the S&P 500
Index (indexed to $100 at start date).

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C A S E I N P O I N T
F
R U I T O F T H E
L
O O M
, 2 0 0 2
In 2001, while Fruit of the Loom was operating under the su-
pervision of the bankruptcy court, Berkshire Hathaway offered
to purchase the apparel part of the company (its core business)
for $835 million in cash. As part of its bankruptcy agreement,
Fruit of the Loom was required to conduct an auction for com-
petitive offers. In January 2002, the court announced that Berk-
shire was the successful bidder, with the proceeds of the sale to
go to creditors.
At the time of Berkshire’s offer, Fruit of the Loom had a
total debt of about $1.6 billion—$1.2 billion to secured lenders
and bondholders and $400 million to unsecured bondholders.
Under the terms of the agreement, secured creditors received
an estimated 73 cents on the dollar for their claims, unsecured
creditors about 10 cents.
Just before f iling for bankruptcy in 1999, the company had
$2.35 billion in assets, then lost money during reorganization.
As of October 31, 2000, assets were $2.02 billion.
So, in simplif ied terms, Buffett bought a company with $2
billion in assets for $835 million, which went to pay the out-
standing debt of $1.6 billion.
But there was a nice kicker. Soon after Fruit of the Loom
went bankrupt, Berkshire bought its debt ( both bonds and bank
loans) for about 50 percent of face value. Throughout the bank-
ruptcy period, interest payments on senior debt continued, earn-
ing Berkshire a return of about 15 percent. In effect, Buffett had
bought a company that owed him money, and repaid it. As
Buffett explained it, “Our holdings grew to 10 percent of Fruit’s
senior debt, which will probably end up returning us about
70 percent of face value. Through this investment, we indirectly
reduced our purchase price for the whole company by a small
amount.”
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(Continued)

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1 3 8
T H E W A R R E N B U F F E T T W AY
Clayton Homes
Berkshire’s purchase of Clayton was not all smooth sailing; a legal bat-
tle erupted over the selling price.
At $12.50 per share, Buffett’s April 2003 offer for Clayton was at
the low end of the $11.49 to $15.58 range that bankers had assigned to
the shares a month earlier. Clayton management argued that the deal
was fair considering the industry’s slump at the time. But Clayton
shareholders mounted a battle in the courts, saying that Berkshire’s offer
was far below the real value of Clayton’s shares. James J. Dorr, general
counsel for Orbis Investment Management Ltd., which voted its 5.4
percent stake against the merger, grumbled, “The fact that it’s Warren
Buffett who wants to buy from you should tell you that you shouldn’t
sell, at least not at his price.”
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For a value investor, that is probably a
very high compliment.
Warren Buffett defended his offer. At the time of the shareholder
vote, he wrote, “the mobile home business was in bad shape and com-
panies such as Clayton, which needs at least $1 billion of f inancing
each year and faces declining sales, would continue to have a hard time
f inding funds.” Clayton’s board apparently agreed. Then, as evidence
of his commitment to Clayton, Buffett added that he had advanced
the company $360 million of f inancing since his offer.
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Buffett and
Clayton management ended up winning the shareholder battle by a
narrow margin.
Warren Buffett is one of the few people who could charac-
terize $105 million as a “small amount,” but, in fact, after tak-
ing into account these interest payments, the net purchase price
for the company was $730 million.
At the time Berkshire’s offer was being reviewed by the
bankruptcy court, a reporter for the