Will Berkshire Hathaway Buy Southwest Airlines?

Boeing employees pose in front of a 737 MAX 8 produced for Southwest Airlines as Boeing celebrates the 10,000th 737 to come off the production line in Renton, Washington, March 13, 2018. Photo: REUTERS/Jason Redmond

By Adam Levine-Weinberg, International Business Times

Earlier this year, Warren Buffett turned heads when he stated during a CNBC interview that he would consider having Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) buy an entire airline. The conglomerate already owns significant stakes in the four largest U.S. airlines, but an outright acquisition of one would allow it to put more money to work.

Earlier this year, Warren Buffett turned heads when he stated during a CNBC interview that he would consider having Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) buy an entire airline. The conglomerate already owns significant stakes in the four largest U.S. airlines, but an outright acquisition of one would allow it to put more money to work.

Southwest Airlines does seem like a good target — at the right price

[post_ads]There's no concrete evidence yet that Berkshire Hathaway is seriously considering buying Southwest Airlines. Buffett is famously patient and could opt to use excess cash to buy back Berkshire Hathaway stock or continue holding it until the next bear market.

That said, analysts are right to highlight Southwest as one of the most compelling acquisition options today. For one thing, its operating margin is starting to stabilize and could begin rising again as soon as the fourth quarter. Analysts currently project that earnings per share will surge 20% year over year in 2019. It also has substantial long-term growth opportunities in markets like Hawaii, Canada, and Latin America.

Furthermore, Southwest Airlines would be a meaningful investment for Berkshire Hathaway. The company currently has a $34 billion market cap. With a typical deal premium, it would cost a minimum of $40 billion, using up a substantial chunk of Berkshire Hathaway's excess cash.

Finally, Southwest Airlines stock is reasonably priced. It currently trades for a little less than $60, or 12 times forward earnings. Berkshire Hathaway could thus offer shareholders a sizable takeover premium without overpaying. There's no guarantee the two companies will ever make a deal, but Southwest Airlines and Berkshire Hathaway certainly look like a match made in heaven.

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