Description
Berkshire Hathaway Share Class Spread Trade
The idea is to buy Berkshire Hathaway Class B Stock (BRK.B) while shorting Berkshire Hathaway Class A (BRK.A) stock.
Currently the spread is approximately $5200 per share.
BRK.A is convertible into 30 shares BRK.B.
BRK.A has greater voting rights.
In all other ways, the shares are "equal".
Historically the shares have traded at roughly equal (30:1) prices. On various occasions the spreads have widened during market declines or severe periods of volatility. Since the BRK.B shares are lower priced they are typically owned by smaller, more retail type investors. The Gates Foundation and WEB also own B Shares (which are sold for charitable purposes, perhaps causing occasional downward pressure).
As of 10/31/2008 there were the following amounts of stock outstanding
| Class |
Buffett Munger Gates Owned |
Outstanding |
% |
| |
|
|
|
| A |
364,587 |
1,060,657 |
34.4% |
| |
|
|
|
| B |
4,082,980 |
14,657,083 |
27.9% |
The B shares typically trade 40k shares a day. Last Wednesday 2/18/2009 to Friday 2/20/2009 they traded 75k-175k.
Unconfirmed rumors were that there were holders being margin called in the class B shares. While it would be interesting if true, it is not a cornerstone of the bet.
We do know there was irrational selling of B shares which depressed the prices (as it is unlikely to be something fundamental about the B shares in particular which would cause them to be sold down to this large a discount).
Catalysts
Return of rationality
Ceasing of B Share selling
A Holders swap into B Shares and sell A shares (and also realize likely tax losses for recent purchasers of A shares)
Risks
Market remains irrational (and gets more so)
Classic LTCM relative value trade.
Below is a memo written by Warren Buffett.
BERKSHIRE HATHAWAY INC.
1440 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE (402) 346-1400
WARREN E. BUFFETT, CHAIRMAN
Memo
From: Warren Buffett
Subject: Comparative Rights and Relative Prices of Berkshire Class A and Class B Stock
Date: February 2, 1999 Updated July 3, 2003
Comparison of Berkshire Hathaway Inc. Class A and Class B Common Stock
Berkshire Hathaway Inc. has two classes of common stock designated Class A and Class B. A share of Class B common stock has the rights of 1/30th of a share of Class A common stock except that a Class B share has 1/200th of the voting rights of a Class A share (rather than 1/30th of the vote). Each share of a Class A common stock is convertible at any time, at the holder's option, into 30 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares. Both Class A & B shareholders are entitled to attend the Berkshire Hathaway Annual Meeting which is held the first Saturday in May.
The Relative Prices of Berkshire Class A and Class B Stock
The Class B can never sell for anything more than a tiny fraction above 1/30th of the price of A. When it rises above 1/30th, arbitrage takes place in which someone ¾ perhaps the NYSE specialist ¾ buys the A and converts it into B. This pushes the prices back into a 1:30 ratio.
On the other hand, the B can sell for less than 1/30th the price of the A since conversion doesn't go in the reverse direction. All of this was spelled out in the prospectus that accompanied the issuance of the Class B.
When there is more demand for the B (relative to supply) than for the A, the B will sell at roughly 1/30th of the price of A. When there's a lesser demand, it will fall to a discount.
In my opinion, most of the time, the demand for the B will be such that it will trade at about 1/30th of the price of the A. However, from time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again, when the B is at a discount of more than say, 2%, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 30 or more B should consider buying A instead.
Catalyst
Catalysts
Return of rationality
Ceasing of B Share selling
A Holders swap into B Shares and sell A shares (and also realize likely tax losses for recent purchasers of A shares)
Risks
Market remains irrational (and gets more so)
Classic LTCM relative value trade.
Disclaimer:
The author of this posting and related persons or entities ("Author") currently own the shares of Berkshire Hathaway Class B ("BRKB") and have short and long positions in securities of Berkshire Hathaway Class A ("BRKA"). The Author makes no representation that it will continue to hold positions in the securities of BRKA or BRKB. In fact the Author is likely to buy or sell long or short securities of either issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions. Additionally, because the Author has these current positions the reader may assume that the Author is biased in favor of his investment view and may also be mistaken. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The reader agrees to not invest based on this note and to perform his or her own due diligence and research before making an investment in securities of these issuers. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.