Here's an interesting private equity story from the history books.

The story is about a smokeless tobacco company called Conwood. They were famous for their snuff product.

The year is 1984.

Management of Conwood planned a merger with Gulf Broadcasting (a Houston based TV station operator). By April, they scrap the idea of a merger and hire investment banker Jerry Seslowe to sell the business.

Jerry tracks down Warren Buffett as a potential buyer. He already owns stock in RJ Reynolds, and likes the tobacco business:

I'll tell you why I like the cigarette business, it costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty. ~ Warren Buffett

Conwood is an excellent business. In fact it has some of the same qualities of another favorite Berkshire investment, See's Candies (see below)

CONWOOD VS SEE’S (1972-1984 CAGRs)

• Unit growth: 6% vs 4%
• Price increases: 9% vs 9%
• Revenues: 15% vs 13%
• Net profit: 17% vs 17%

Warren and Charlie go to visit Conwood in Memphis and decide to pass on the deal...

At that moment, Warren and Charlie drew a line in the sand on the morality of their investment philosophy for Berkshire.

"I'm not sure the logic is perfect, but we wouldn't have trouble owning stock in a [tobacco] company. We wouldn't want to manufacture [tobacco]. We might own a retail company that sells [tobacco]…The lines aren't perfect on this sort of thing." ~ Buffett

Charlie Munger on the decision, and walking away.

You know, we were very young and poor by modern standards. And we could see it was like putting $100 million in a bushel basket and setting it on fire as we walked away ~ Charlie Munger

When Warren and Munger passed on the opportunity, that's when Jerry Seslowe brought Jay Pritzker into the picture.

Jay Pritzker's family was Jewish Ukrainian and moved to Chicago in the late 1800s. His father was a lawyer and investor. Jay became a famous entepreneur and investor as well and founded the Hyatt hotel group.

Jay learns about the Conwood deal and swoops in immediately to buy it.

The purchase price: $350 million (net)

• Consideration: $401 million
• Less net cash: $51 million = Purchase price: $350 million

Here’s how Jay Pritzker financed the deal:

- $120 million term loan

- $210 million debentures

- $20 million equity

= $350 million purchase price

Conwood an excellent LBO candidate for a few reasons:

• pricing power (most important)
• recession proof (it's addicting)
• retail loves it (high margin, repeat purchase)

20 years later Pritzker sold Conwood for $3.6 billion to Reynolds.

RESULTS

- Purchase Price (1985): $350 million

- Purchase Equity (1985): $20 million

- Sale (2005): $3.6 billion

- Dividends (est): $1.5 billion

RETURNS - TPVI: 260X - IRR: 49%

Total returns 5.08 Billion

Another interesting part of the story

In 1982 Braniff Airlines filed for bankruptcy.

Pritzker bought the business out of bankruptcy and named it Dalfort.

Dalfort had accumulated losses over the years. In those days you could buy a company for its losses, and carry those losses forward to offset future taxes. Dalfort had accumulated 353 Million of losses and $51 Million of tax credits.

Dalfort bought 95% of the stock of Conwood, and presumably used its losses to offset future gains (I can't confirm this).

​

Fun History: Conwood owns the oldest continually used trademark in US history

This graph represents the power of Pricing. Over 25 years the volume of non-moist snuff sales drops by 65%. Yet, the returns at Conwood boom.

​

Another side note

Pritzker spent $100 Million buying Braniff Airlines out of Bankruptcy in 1982. In 1984 they restarted the airline. By 1987 they filed for Chapter 11 again.

The purchase of Conwood easily offset the losses at Braniff Airlines.

Warren Buffett has a famous position on airline investing. He says:

"Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results. It's been a death trap for them" ~ Buffett

Zyn tobacco is the modern day Conwood. Zyn sales this year crossed over 1 Billion units.

Thanksgiving is my favorite holiday! I hope you have a great one,

Sieva

‍

Please let me know what you think of this story. Reply back to this email to let me know, or pick one of the ratings below:

👉​💰💰💰💰💰 Top-notch!​ ​

👉​💰💰 It’s ok​ ​

👉​Not great, try again​​

​

​

Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.