Buffett Buying Iscar? Interesting Tax
by: berkiemanweb
Long-Term Sentiment: Strong Buy 05/17/06 12:19 pm
Msg: 333009 of 333208

Think Warren Buffett is paying $4 billion for Iscar? Think again

--------------------------------------------------------------------------------

Knight-Ridder Open
12:15 p.m. 05/17/2006


May 16, 2006 (Globes - Knight Ridder/Tribune Business News via COMTEX)
-- 1. What brought the world's biggest investor to Israel? The answer
is much simpler than people think: He found an investment that meets
his strict criteria in Israel's Tefen Industrial Park.

Having created substantial value for his investors for decades, Warren
Buffett has had difficulty continuing his success over the last two
years. The markets have been rising consistently, and the search for
long-term quality investments has become much more competitive. When
there's competition, prices rise, and yields go down, not the sort of
thing Buffett likes. And when Berkshire Hathaway Inc. (BRKA) (BRKB)
begins to falter, the need for investment outside the US grows ever
stronger.

This brings us to the investment in Iscar. On the face of it, Buffet
paid $4 billion for 80 percent of the Israeli metal cutting toolmaker
company. Why only on the face of it? Because in actual fact, the sum
was a great deal lower.

While the structure of the deal is not known, it seems that Buffett
has set up a local company that will acquire 80 percent of the
activity of Iscar from the Iscar group, controlled by the Wertheimer
family. The family will retain control over the old Iscar, which will
own 20 percent of the activity. In the next stage, a company will be
formed, into which Iscar's activity will be transferred (by both
sides), leaving Buffett with an 80 percent stake in the new company,
which will take in all Iscar's activity.

Buffett, therefore, is buying activity, rather than company stock. The
significance for tax is a benefit of around $1 billion over a 10 year
period. Why? Because income tax regulations allow the recognition of
amortization of goodwill on deals for acquisition of current activity
at an annual rate of 10 percent of the goodwill. Almost all the sum
paid for Iscar's activity will be attributed to goodwill, resulting in
an annual tax-deductible expense of $400 million. This expense will
generate a tax saving of $100 million, assuming an effective tax rate
of 25 percent for Iscar (for which it qualifies as a company with
approved enterprise status). $100 million over 10 years is the
expected saving, amounting to $1 billion.

That's not all. Buffett will probably be granted (quite rightly)
strategic investor status. This will mean that (subject investment in
plant), any increase in profit is tax free, and there will also be no
tax on capital gains or dividend distributions for 10 years. Iscar's
current profits are estimated at $400 million; the benefit for Buffett
will amount to several hundred million dollars at least.

To sum up: Buffett is actually getting 80 percent of Iscar for around
$2.5 billion. Iscar's value for Buffett will therefore total $3
billion, giving a profit multiple of 7.5, compared with multiples of
20 and 30 that his other companies have. This is why the legendary
investor didn't even bother to come to Tefen to close the deal. Anyone
would have seized the opportunity.

2. Buffett is the world's most important, best known, and most
respected investor. He is not just a successful investor; he has
become a real guru.