BERKSHIRE HATHAWAY’S TOBACCO HISTORY PART VI - THE DEAL THAT GOT AWAY [i]
CHARLIE MUNGER 1924-2023
Charlie Munger died last week, just shy of his 100th birthday which would have been January 1. He was an outstanding investor and an even more notable mentor to other investors and businesses. People with his wisdom and willingness to share it are rare, and he will certainly be missed.
Munger talked about an early deal that Buffett and he considered and rejected – Conwood Tobacco. He never said when this happened, but $100 million price was significant to them. (Berkshire now has $157 billion in cash, enough to do 1,500 Conwood-size deals). Conwood was a small oral tobacco manufacturer in Memphis.
CONWOOD HISTORY
1782 – John Garrett II established the first Garrett snuff mill on Red Clay Creek in northern Delaware. For the next 113 years, the Garrett family ran the business.
1895 - the Garrets sold W.E. Garrett & Sons to three employees, for one dollar.
1898 – The surviving company became the cornerstone of the Atlantic Snuff Company.
1900 – In his American Tobacco Trust, James Buchannan Duke formed the American Snuff Company. It combined the George W. Helme Company, the Atlantic Snuff Company, Stewart Ralph & Co., Bruton & Condon (Conwood established 1900 in New York City), and Ivy Owen & Co.
1904 – Conwood began manufacturing smokeless tobacco products in Tennessee.
1907 – President Teddy Roosevelt, dissolved the trusts in America, including the American Tobacco Trust. In the Trust, American Snuff Co. divided into three smaller companies: a new American Snuff, Weyman and Burton (now U.S. Tobacco) and George W. Helm. The division was based on specific brands. Martin J. Condon, head of American Snuff (Conwood), had first choice and chose Garrett Snuff.
1912 - American Snuff Company moved its offices from New York to Memphis.
It prospered under the direction of Martin Condon and James Harwood thru the 1930’s.
1932, Martin Condon broadened the product lines to include sweet-flavored snuff.
American Snuff made only snuff from 1912 thru 1952, constantly improving production methods to reduce labor, energy, and transportation costs.
1940 - World War II boosted sales. “Smokeless tobacco” was the only tobacco products allowed in defense plants and the Britons used it during the blackouts. After World War II, sales declined, and the American Snuff Company grew by diversification.
1953 - American Snuff purchased Taylor Brothers Tobacco in Winston-Salem, NC. Taylor Brothers’ twist, plug and loose-leaf chewing tobaccos gave American Snuff wider distribution.
1957 - American Snuff purchased Hot Shot insect repellent. Hot Shot sales grew from $400,000 to $4 million in the next two years.
1961 - American Snuff bought Blevins Popcorn Co.
1966 - American Snuff, now diversified, changed its name to Conwood.
1967 - Conwood purchased Scott Tobacco, a maker of hand-rolled twist tobacco. Conwood developed the foil pouch used in packaging loose leaf chewing tobacco.
1985 -Conwood paid dividends every year from 1901 through 1985.
1986 - The Pritzker family of Chicago purchased Conwood for $408 million.
2005 – Conwood’s net sales exceeded $450 million and operating income was $250 million.
2006 - Reynolds American purchased Conwood from the Pritzkers for $3.5 billion dollars. Charlie Munger described the deal:
“We didn't pay up. Jay Pritzker just snapped it up so fast. The Pritzkers made (more than) $3 billion out of that.
2009 – Conwood’s name is changed to American Snuff Company.
2023 - American Snuff is a subsidiary of Reynolds American, owned by British American Tobacco. It makes dipping tobacco or moist snuff, loose-leaf chewing tobacco, plug, twist, and dry snuff.
American Snuff’s “Garrett” is the sole survivor of ten trademarks recorded on October 25, 1870, the first day the US Patent Office began granting trademarks. Garrett is the oldest continuous trademark in the United States.
This table shows the consistent growth of the business for 32 years. Its operating profit had grown 8.9% annually when Reynolds American acquired it.
Munger’s story raises two questions:
Why were Buffett and he so skittish about buying Conwood? He answered this question (at least partially) as he discussed ethical and corporate image concerns.
The other question goes to the heart of how Buffett and Munger look at investments - How did they know that Conwood was a great deal? Munger recalled years later:
“We were offered the chance to buy a company that has since done sensationally well. We sat in a hotel lobby in Memphis, talked about it, and decided we didn’t want to do it. It was just like putting $100 million in a bushel basket and setting it on fire as we walked away.”
Munger never said when this happened, but let’s assume it was about 1977. Berkshire had only $180 million in cash. And Conwood’s 1977 net earnings could have been as little as $10 million. So, Conwood did not meet Buffett’s criterion of an immediate 15% return. It could only meet his hurdle rate if there was growth.
This is Buffett’s genius. I would have concluded that Conwood was worth no more than 7x earnings - a small company in an industry that was being vilified for its deadly products. He must have intuitively grasped the growth potential from his encyclopedic knowledge of businesses and industries.
[i] Charlie Munger’s description of Conwood only scratched the surface about this amazing company. In a final chapter, we will look at the company Reynolds American bought in 2006 – what made it an iconic business and unbelievably profitable.