Berkshire Hathaway and the Haslam family have reached an agreement to settle lawsuits related to a dispute over the valuation of Pilot Travel Centers, canceling a trial that was set to begin Monday.
Key Details of the Settlement
The terms of the settlement were not disclosed. However, the agreement ends a bitter legal fight between Berkshire Hathaway CEO Warren Buffett and Cleveland Browns owner Jimmy Haslam that could have resulted in billions of dollars in damages.
- The dispute centered on the value of Pilot Travel Centers and terms of a deal under which Berkshire would acquire 38.6% of the company in 2023, with full ownership by 2025.
- Berkshire claimed Haslam’s company violated a contract requiring good faith and fair dealing by misrepresenting Pilot’s value.
- In turn, Pilot alleged Berkshire was trying to back out of the deal to avoid paying fair market value. Both sides sought over $1 billion in damages from the other.
- With the settlement, the existing agreement is expected to remain in effect and on schedule. Berkshire will purchase more Pilot shares this year and take full control by 2025.
“I’m pleased we were able to reach an agreement that is mutually beneficial for both parties and avoids years of litigation,” said Buffett in a statement. The Haslams also expressed satisfaction with putting the legal battle behind them.
Background of Berkshire’s Investment in Pilot
Berkshire first took a 38.6% stake in Pilot Travel Centers in 2017, with an agreement to acquire majority ownership in 2023 and full ownership in 2025.
- Pilot is the largest U.S. operator of travel centers, with over 750 locations across North America.
- Berkshire’s investment was valued at $2.76 billion in 2017 based on estimated 2025 earnings.
- Under the terms, Berkshire is supposed to pay a premium in 2023 and 2025 based on Pilot’s growth over that period.
Disputes emerged in recent years over Pilot’s financial projections and allegations from both sides that the other was not acting in good faith to calculate accurate valuations. This prompted Berkshire to file suit in June 2022 seeking damages for alleged violations of the deal terms.
What Led to the Legal Dispute
At issue was the value of Pilot Travel Centers and whether proper procedures were followed in assessing this value to determine Berkshire’s future share purchases.
- Berkshire alleged Pilot withheld key financial information, preventing them from properly assessing the 2023 and 2025 valuations as required under the deal.
- Pilot countered that Berkshire was trying to back out because diesel prices and other factors had greatly increased Pilot’s value since 2017, meaning Berkshire would have to pay billions more than they had anticipated.
The heart of the disagreement centered on whether Pilot misrepresented its value in 2017 and again in negotiations over the 2023 valuation, violating the contractual obligation to negotiate in good faith to reach a fair market price.
Berkshire sought over $1 billion in damages from Pilot to compensate for these alleged violations. Meanwhile, Pilot claimed over $1 billion in damages from Berkshire for trying to unlawfully change the deal terms to pay less than Pilot was worth.
What Comes Next with Pilot Travel Centers
With the lawsuits settled, the original agreement is expected to resume as planned when it comes to Berkshire acquiring larger stakes in Pilot over the next two years:
- 2023: Berkshire will purchase enough newly issued shares of Pilot to give it majority ownership, paying a premium price based on the company’s growth since 2017.
- 2025: Berkshire purchases the remaining shares from the Haslam family, again paying a premium for Pilot’s value increase over the full investment period.
While the exact numbers are confidential under the settlement, analysts estimate Berkshire may now end up paying over $5 billion more compared to original projections in order to acquire full ownership of Pilot Travel Centers.
For the Haslams, the settlement ensures they maximize the return on investment from the stake sale while still getting a significant payout this year and in 2025. Meanwhile Berkshire locks in ownership of the nation’s premier travel center chain to further expand and add to its giant portfolio of companies.
The settlement also avoids a lengthy and messy court battle that could have damaged the reputations of Buffett, the Haslams, and Pilot. Instead, both sides said they look forward to focusing on Pilot Travel Centers’ continued growth in serving professional drivers across North America.
Financial Impacts of Settlement
While full financial details remain confidential, analysts expect the final valuations and price paid by Berkshire for owning Pilot will be substantially higher than first agreed upon in 2017 given the company’s strong performance over the past 5+ years.
- Based on Pilot’s estimated 2025 earnings, Berkshire may end up paying over $8 billion more compared to initial projections from when the deal was first announced.
- At the time, Berkshire valued its eventual 80% stake at $2.76 billion based on Pilot’s estimated 2025 earnings.
- Accounting for growth, Pilot could now be worth $15 billion or more by 2025, meaning an 80% majority share would cost Berkshire $12 billion.
Despite the increased payout, Berkshire is seen as the long-term winner having secured full ownership of Pilot’s nationwide chain of travel centers.
For the Haslams, the premium sale prices reflect the tremendous value they built in Pilot under their ownership, cementing a strong return on their decades of investing in and expanding the business.
Conclusion
The settlement avoids a contentious court battle and clears the way for Berkshire Hathaway to move forward with its planned acquisition of Pilot Travel Centers over the next two years. While Warren Buffett will likely pay billions more than originally anticipated, his company gains a very profitable travel center operation that promises continued growth for years to come.
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