Warren Buffett wrote in last year's shareholder letter: "Berkshire seldom sells its controlled subsidiaries unless we believe their problems will continue indefinitely." Last year, the USA real estate agency industry was impacted by housing shortages and high housing prices, and the subsidiary, USA Home Services, reported losses after two consecutive years of profit. If this Trade is completed, it may indicate that Berkshire is willing to sell more smaller, non-core Business segments, thereby streamlining the company and possibly making it easier for Buffett's potential successor, Berkshire executive Greg Abel, to manage.
Buffett has simultaneously been selling Stocks for nine consecutive quarters, with Cash reserves reaching an all-time high, while rarely selling a subsidiary. What is his intention?
According to the Wall Street Journal, the real estate agency $Compass (COMP.US)$ is in deep negotiations to acquire $Berkshire Hathaway-A (BRK.A.US)$ the business - Home Services of America, which is one of the largest real estate agencies in the USA. The report did not mention the price, but Berkshire Hathaway-A may sell the division for several billion dollars.
Buffett has stated multiple times that he would not easily sell any subsidiary unless it faces insurmountable problems. He wrote in the 2024 Shareholder letter:
Berkshire rarely sells its controlling subsidiaries unless we believe their problems will persist endlessly.
Thus, the news that Berkshire's real estate agency business may be acquired marks a significant change in its corporate structure. If this deal goes through, it could mean that Berkshire is willing to sell more smaller, non-core business divisions, thereby streamlining the company, making it potentially easier for Buffett's possible successor, Berkshire executive Greg Abel, to manage.
It is worth noting that the valuation of Home Services of America is not easy to determine, as its Operation is close to breakeven. Barron's estimates that the company's valuation is lower than that of the larger Compass. Even so, the amount of this transaction is just a drop in the bucket compared to Berkshire's 1.1 trillion Market Cap. Given the large size of both companies, this transaction may face antitrust scrutiny.
Last year, the USA faced a housing shortage & high prices that impacted the real estate Industry.
Like the entire Real Estate brokerage Industry, USA housing service companies are affected by the housing shortage and high house prices in 2024.
In 2024, the company had an Operation loss of 0.107 billion dollars, while in comparison, the Net income in 2023 was 13 million dollars, and in 2022, it was a profit of 0.1 billion dollars. Part of the loss in 2024 comes from a lawsuit settlement agreement the company reached, which requires the company to pay 0.25 billion dollars in Real Estate brokerage commission settlement over four years.
Last year, Compass also did not achieve profitability based on GAAP (generally accepted accounting principles), but the company stated in its fourth quarter Earnings Reports that it generated 0.15 billion dollars in Cash / Money Market before deducting the industry collective litigation settlement.
According to Berkshire's 10-K annual report, the USA housing service company has 48 brands, with approximately 37,700 Real Estate agents in nearly 820 brokerage stores. Additionally, the company operates about 270 franchises through two major brands, manages over 1,400 brokerage stores, and has around 44,700 third-party Real Estate agents.
Chris Bloomstran, head of Berkshire's investment company Semper Augustus Investments Group, estimates that the annual sales of this brokerage business is approximately 125 billion dollars, which is part of Berkshire's large utility sector – Berkshire Hathaway Energy Company.
Another reason to pay attention to this potential sale is that the USA housing service company is an industry-leading intermediary that is expected to benefit from the recovery in Real Estate sales.
As of now, $Berkshire Hathaway-A (BRK.A.US)$ and $Compass (COMP.US)$ None of them has made any public comments on this matter. As a result of this news, Berkshire Hathaway rose by 1.5% overnight.
In the past year, the stock price of Compass has increased by 144%, and the current Market Cap has reached 4.5 billion USD.
Editor/Somer
