Berkshire Won't Be Buying This Health Care Company After All


If you're wondering which company Berkshire Hathaway might buy next, go ahead and cross DaVita Healthcare Partners off your list.

As it turns out, Berkshire recently approached the kidney disease specialist about increasing its 14% stake in the company, which led to a formal agreement "that reflects the fact they're a passive investor and this is a friendly relationship," according to Kim Rivera, DaVita's chief legal officer.

That's too bad, considering that DaVita was the first company I singled out in February as a potential acquisition candidate for Berkshire after it announced a joint arrangement with 3G Capital to acquire H.J. Heinz .

After all, Berkshire had added nearly 180,000 shares of DaVita to its portfolio in the fourth quarter of 2012 alone, and it had more than enough cash to buy the remaining $9.5 billion in shares that it didn't already own at the time.

What's more, DaVita's $4.4 billion acquisition of HealthCare Partners last year was a great move to diversify away from its focus on kidney disease and toward the operation of 152 profitable general health care clinics.

Still, a wild card remained with the fact that Berkshire's position was likely opened not by Warren Buffett, but instead by one of his younger investing prodigies in Ted Weschler or Todd Combs. As a result, I noted that Buffett might have required some convincing that DaVita would be able to effectively fit in with the rest of Berkshire's many subsidiaries.

Today's news, however, proves that certainly wasn't outside the realm of possibility. The new agreement, for its part, prohibits Berkshire's stake from rising above 25% and will remain in effect for as long as Berkshire retains an equity stake of 15% of more.

Solid first-quarter earnings
If that weren't good enough, DaVita's first-quarter earnings report Tuesday showed the world why Berkshire likes the company so much. As of this writing, shares hit a new 52-week-high and are trading up more than 9% after the company said sales rose more than 50% year-over-year to $2.83 billion, and adjusted earnings came in at $2.07 per share. Both numbers beat average analyst estimates, which called for earnings per share of $1.80 on revenue of $2.79 billion.

In addition, shareholders don't seem to mind that the company set aside $300 million for the settlement of a U.S. Justice Department investigation into a potential kickback scheme. CEO Kent Thiry did say, however, that a final agreement with the U.S. investigators hasn't been reached yet, asserting, "We've been under the impression for more than a decade that the way we do things is fine, so we've had to do a lot of sorting out with them."

Foolish final thoughts
Of course, it's a safe bet that few companies would complain about Berkshire Hathaway standing as their single largest shareholder -- and for DaVita, that's a vote of confidence that cannot be overstated. As a result, and as long as they maintain Berkshire's seal of approval, I won't be closing my "outperform" CAPScall on the company anytime soon.

More expert advice from The Motley Fool
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Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and H.J. Heinz Company. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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