It was announced in early October but it began in May — the talks leading to Warren Buffett’s sensational purchase of Knoxville-based truck stop chain Pilot Flying J. The billionaire investor through his company Berkshire Hathaway has made other surprising investments before. Buffett recently bought 741,547 shares of Sirius XM Radio, the company that hosts shock jock Howard Stern. And then there’s the time he invested in a two-year insurance policy for Mike Tyson.
A Perfect Target for Warren Buffett
But a truck stop chain?
“The company has a smart growth strategy in place,” Buffett said. “And we look forward to a partnership that supports the trucking industry for years to come.”
It is in fact the 15th largest private company in the U.S. And now Buffett’s purchase will mark a major turning point in its history. This family-owned business is an all-American success story with a long, notable history of profitable operations – a combination of characteristics that made it the perfect target for Warren Buffett (these characteristics match exactly what’s described in Lawrence Cunningham’s really good book Berkshire Beyond Buffett: The Enduring Value of Values).
Pilot Flying J: Result of a Merger
The company is the result of a merger in 2010 between two companies, Pilot Corporation and Flying J., Inc. Flying J. was established as an oil company, but soon after branched out in another direction: the truck stop industry. Its founder, Jay Call, sought to create an environment for truckers with things like clean, hospitable facilities, an opulent array of restaurants, freshly stocked store shelves, lodging accommodations, access to WiFi, and bars open nightly. It’s an environment that helped define this new phenomenon called a “travel plaza,” a multi-million dollar plot of land with numerous diesel fuel islands and huge parking spaces intended specifically for trucks.
Call formed Flying J in 1968, basing its name on his penchant for flying. He established the company’s first full-service travel plaza in 1979. Flying J expanded its operations, especially in the northwest, and by 1986 tripled its annual sales with the $70 million dollar purchase of Canada’s Husky Oil’s U.S. operations. The deal resulted in Flying J becoming the biggest independent oil firm in the northwest.
James Haslam II, meanwhile, formed Pilot in 1958 in Gate City, Virginia. Driven by a spirit of philanthropy, Haslam sought to give back to the community. His areas of focus included professional drivers, health and education, community development, and fellow veterans. The company continued to expand, and in 2001 merged with Marathon Ashland Petroleum, LLC. This marriage gave birth to Pilot Travel Centers LLC, establishing 232 travel centers nationwide.
Then in 2010, after having gained standing as two of the most popular travel center companies in North America, Pilot and Flying J merged, becoming known from then on as Pilot Flying J. Jimmy Haslam III became CEO. And now Pilot Flying J., or Pilot Travel Centers LLC, has expanded into 750 locations in 44 states, with more than 27,000 employees and $20 billion in sales. It operates a variety of amenities for truckers such as convenience stores, food and drink deals at selected restaurants, thousands of parking spaces and diesel lanes, ATM machines, check cashing places, laundromats, game rooms, truck washes, and free WiFi.
Pilot Flying J: Legal Problems
Then in 2013 the FBI and IRS raided their offices amid allegations the company cheated trucking companies out of millions in diesel fuel rebates. After a harrowing legal ordeal, Pilot ended up paying a $92 million settlement, and 14 former Pilot employees pleaded guilty in federal court. Four more employees were scheduled for trial this year. Jimmy Haslam, who denies knowing anything, hasn’t been charged yet.
But Pilot’s legal problems didn’t seem to affect Buffett’s decision.
“I knew about (Pilot’s legal issues),” Buffett said, “but it will not affect the future of the company.”
Yet the deal was closed rather quickly.
“It came together pretty fast,” Buffett said. “We like the business and we like the people, so it worked.”
Buffett Prefers U.S. Companies
The deal reflects Buffett’s commitment to strengthening the U.S. economy, underscoring his preference for American companies. In fact, Berkshire Hathaway already owns a chunk of the American economy, bolstered by such purchases as Burlington Northern Santa Fe Railroad (BNSR) and Precision Castparts Corp.
Regarding the BNSR deal, Buffett said, “It’s an all-in wager on the economic future of the United States.”
No Change in Location or Management
The Pilot Flying J deal will give Berkshire a 38.6 percent stake in the firm, and in 2023 an additional 41.4 percent, making it majority owner. For now, the Haslam family will keep a 50.1 percent share, and minority owner FJ Management, Inc., owned by the Maggelet family, will retain a 11.3 percent interest.
Buffett will stick to his practice of keeping the company’s headquarters and management team in place.
“We’ve never made a move of the home office of any company we’ve bought,” Buffett said. “We don’t buy companies to change them.”
Article by Vintage Value Investing