The rumors first hit in mid-July when both Buffett and John Malone, who seems to own everything in the telecom industry, met with Sprint Corp (NYSE:S) chairman Masayoshi Son in Sun Valley while attending the annual Allen & Co. media finance conference. That got owners of Sprint stock excited once more about the possibilities.
Speculation was that Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) will invest as much as $20 billion in some kind of arrangement fronted by John Malone, who is the largest shareholder of Charter Communications, Inc. (NASDAQ:CHTR), to bring Sprint together with Charter.
Wishful Thinking?
The problem with this scenario is that Comcast Corporation (NASDAQ:CMCSA) has to approve any tie-up given it has a one-year deal with Charter to work together to develop their respective wireless networks; that agreement prohibits a major deal without its consent.
“It’s a tough business,” Comcast CEO Brian Roberts told analysts in late July. “I don’t see something happening in that industry that we envy a position that we don’t have today.”
In other words, Comcast has no interest in Sprint stock, but at the same time, you have to think it wouldn’t be so quick to give Charter its blessing.
As if that’s not enough, Charter CEO Tom Rutledge also isn’t in a hurry to saddle up to Sprint.
“We like our relationship with Verizon,” Rutledge said. “We like our potential relationship with Comcast. And we do think that the industry has a lot of challenges in front of it, and that it’s fully penetrated.”
Sprint Stock: Buffett’s Worst Deal?
The Berkshire Hathaway CEO has said that one of his worst deals in the history of the company was buying the Dexter Shoe Company.
“I made an even worse mistake when I said ‘yes’ to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A),” Buffett wrote in the 2007 shareholder letter. “I gave away 1.6% of a wonderful business — one now valued at $220 billion — to buy a worthless business. To date, Dexter is the worst deal that I’ve made.”
Well, in my opinion, if he puts any amount of money into Sprint, it will turn out to be an even worse investment than Dexter Shoe for several reasons.
First, it sends a signal to Berkshire Hathaway shareholders that the investment genius has run out of good ideas. Seriously, my cat could come up with a better way to invest the $20 billion. For example, Buffett could buy VCA Inc (NASDAQ:WOOF), an operator of close to 800 animal hospitals, which has an enterprise value of almost $9 billion and it makes money. That would leave another $10 billion to invest.
The point is, a S stock investment reeks of desperation, and Buffett is the last person who needs to act this way.
Secondly, Buffett invests in businesses that generally deliver high rates of return, something Sprint stock isn’t exactly known for.
“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return,” Buffett wrote in the 1992 shareholder letter.
There’s absolutely no point putting any of Berkshire Hathaway’s capital at risk to deliver sub-standard returns. Yes, it’s possible that Buffett could negotiate excellent terms on the loan or equity investment or whatever you want to call it as he’s done in the past, but it’s really not worth it.
The Berkshire Hathaway of 2017 is about buying large businesses that can run themselves, like Kraft Heinz Co (NASDAQ:KHC), and can deliver above-average returns on capital.
Bottom Line on S Stock
InvestorPlace’s Tom Taulli recently suggested that Sprint stock could be worth $14 in a buyout. I respect Tom’s opinion so let’s just assume he’s bang on.
It still doesn’t change the fact that Berkshire Hathaway should absolutely NOT be investing any money in S stock because this isn’t a company that can be turned into a consistent money-maker anytime soon. That’s especially true considering the wireless companies are going to have to invest heavily to roll out 5G.
As the headline suggests, if Buffett puts any money in Sprint, I’d seriously reconsider your investment in BRK.B.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
