In several previous posts to this blog, I have highlighted Berkshire Hathaway’s continuing purchases of shares in DaVita HealthCare Partners (primarily a major kidney dialysis company) throughout 2012 and as recently as March 4, 2013. As a result, Berkshire currently owns approximately 15% of DaVita’s shares. Ted Weschler, who joined Berkshire in early 2012 as one of Warren Buffett’s new portfolio managers (along with Todd Combs who was hired the year before), has been a long time investor in DaVita. Prior to 2012, Ted Weschler owned a large stake in DaVita in his hedge fund, Peninsula Capital Advisors. DaVita was one of Peninsula Capital’s largest investments over the last 10 years of this fund. Earlier in his career, Mr. Weschler was a senior executive at W.R. Grace & Co. where he played a major role in evaluating capital requests for Grace’s National Medical Care subsidiary (a large kidney dialysis company).
I am quoted in a Kiplinger article mentioning DaVita as a company Warren Buffett might want to own:
For Buffett watchers, changes to Berkshire Hathaway’s common stock holdings may offer important clues to the Oracle of Omaha’s thinking. David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland, says DaVita HealthCare Partners (DVA) may be one name on Buffett’s list because Berkshire has been increasing its stake in the company over the past few years. Berkshire was buying shares of DaVita, which is one of the largest providers of dialysis services in the U.S., as recently as March of this year. With 13% of the outstanding shares, Berkshire is now DaVita’s largest shareholder.
DaVita appears to match Buffett’s preference for companies with sustainable competitive advantages. The company accounts for about one-third of the dialysis market in the U.S. &mdash it has almost 2,000 outpatient facilities and serves about 153,000 patients &mdash and its share has been growing in recent years. Kass says the company benefits from economies of scale, meaning that by running a large operation it can keep costs down. It also has a strong brand name.
The impetus for Berkshire’s large DaVita holdings appears to come from Ted Weschler, a Berkshire newbie. Weschler and former hedge fund manager Todd Combs, another relative newcomer to Berkshire, are being groomed to eventually replace Buffett as overseers of the company’s entire investment portfolio. Each is managing about $6 billion worth of Berkshire’s stock portfolio, which totals about $87 billion.
Weschler held a significant position in DaVita through Peninsula Capital Advisors, the hedge fund he managed before joining Berkshire. Weschler also helped to orchestrate the acquisition of a dialysis firm when he worked for W.R. Grace, a chemical company, in the 1980s. “He has been following this industry for maybe 20 years, and he knows the economics of the industry as well as anyone,” Kass says.
Kass believes Berkshire could be approaching an acquisition of DaVita in a manner similar to its purchase of Burlington Northern Santa Fe in 2010. In that instance, Berkshire built up a 23% stake in the railroad’s shares over a number of years before it struck a deal to purchase the remainder of the company.
The big question is whether Buffett, who’s known for his bargain-hunting acumen, would be willing to pay up for DaVita, which at $119.02 per share is already trading for a 16 times the $7.49 per share analysts expect the company to earn in 2013. That may be up to Weschler’s powers of persuasion (share prices are as of April 29).
The entire article is available at: