The other day, I saw an article in The Wall Street Journal about stock buybacks’ pros and cons. It got me thinking about some of the best stock-based deals of all time. One deal that’s often mentioned is the $19 billion purchase by Disney (NYSE:DIS) of Capital Cities/American Broadcasting Companies in February 1996. Cap Cities shareholders got a trio of choices that included Disney stock and $65 cash, 100% Disney stock, or 100% cash.
I’m not a fan of indiscriminate share repurchases. I think they should be done when shares are undervalued and then used as currency when expensive. To merely buy “x” percentage of your stock each year or to commit to a percentage of your free cash flow routinely going to buybacks is lazy capital allocation.
Anyway, the Disney deal certainly was a feather in Warren Buffett’s cap. It put him on the map of American investors. And he most certainly made a lot of money from it.
According to a 2019 Markets Insider article, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) twice invested in Disney stock, leaving as much as $20 billion on the table in unrealized profits by selling too soon.
Let’s follow the trail from 1996 through today.
Disney Stock Was Trading at $15.72
Adjusted for splits and dividends, DIS stock traded for $15.72 a share on Feb. 9, 1996, the day before its merger with Cap Cities was completed. As of the Dec. 4 closing price of $154.14, it has an annualized total return of 9.7% over 25 years.
Interestingly, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and Berkshire’s Class A shares — its B shares didn’t exist until May 1996 — over the same period earned 9.2% and 10.1% on an annualized basis, respectively.
The journey started for Buffett in March 1985 when he bought an 18% stake in the merged entity of Capital Cities/ABC for $517 million. Buffett provided financial advice for Cap Cities CEO Tom Murphy, a long-time friend of the billionaire.
Then, Disney announced in July 1995 that it would acquire Capital Cities/ABC for $19 billion. Buffett ultimately took Disney stock for his 20 million Cap Cities shares, which were worth $2.47 billion at the end of 1995.
Although Buffett wanted 100% stock, he ultimately got $1.4 billion in after-tax cash and 24.62 million Disney shares.
So, in the 10 years Berkshire owned Capital Cities/ABC stock, the holding company generated a return of 16.9% on its investment. And that doesn’t include dividends.
Disney Share Splits
Berkshire Hathaway held 21.56 million shares of Disney at the end of 1997; DIS split 3-for-1 in July 1998, leaving it with 51.20 million (17.07 million pre-split) at the end of 1998 and none by the end of the first quarter in 1999.
The Markets Insider article suggests that the holdings, had Buffett kept them through August 2019, would have been worth five times as much or $8.9 billion.
In June 2007, Disney spun-off its ABC Radio division in the form of a share dividend. The radio division then merged with Citadel Broadcasting, with Disney shareholders getting one Citadel share for every share held in ABC Radio. Ultimately, Disney shares got 1.014 shares of Disney for every share held in the parent.
Based on 24.62 million Disney shares Berkshire got in the Cap Cities merger and the two subsequent splits, the holding company would have 74.89 million shares. At current prices, the holdings would be worth $11.5 billion.
That’s an annualized return of 9.3% on Disney over 25 years based on a starting value of $2.47 billion at the end of 1995, and that doesn’t include dividends. In hindsight, even with Disney’s sluggishness over the past three years, that’s an excellent return.
How would Buffett have done if he had bought $517 million worth of Berkshire Hathaway stock instead of Capital Cities/ABC in March 1985?
Based on a March 15, 1985, Class A share price of $1,475, $517 million would have bought Berkshire 350,508 shares. Those shares today are worth $121.6 billion based on a Dec. 4 share price of $347,000.
That’s an annualized total return of 16.9% over 35 years.
The Bottom Line
While Capital Cities/ABC and the subsequent Disney investments were good moves by Buffett, rolling the money into Berkshire stock would have been an even better play in 1985.
Of course, hindsight is 20/20.
When I last wrote about Disney in May, it was trading around $110. I thought a good entry point was in the $90s. It never quite made it there.
At the time, it had an Altman Z-Score of 1.80 — anything below 1.81 is considered a distressed stock that could go bankrupt within 24 months — which told me that unless it got its Parks business under control and growing again, its debt load would kill it despite the streaming growth.
Fast forward seven months. Its Altman Z-Score improved to 2.11. With Disney+ doing well and interest rates likely to remain low for 12 to 24 months, it looks as though Disney’s going to be fine.
However, up 40% since May, it’s easy to see why Buffett hasn’t bought back into Disney.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.