What’s behind Warren Buffett’s fight with a truck-stop mogul

Warren Buffett and Jimmy Haslam are fighting over a seemingly obscure accounting method. What’s really at stake: possibly as much as $1.82bn.

Warren Buffett and truck-stop mogul Jimmy Haslam are fighting over a seemingly obscure accounting method. Picture: Johannes Eisele/AFP

Warren Buffett and truck-stop mogul Jimmy Haslam are fighting over a seemingly obscure accounting method. What’s really at stake: possibly as much as $US1.2bn ($1.82bn).

Buffett of course is chairman and chief executive of Berkshire Hathaway. Haslam, who owns the Cleveland Browns football team with his wife Dee, built his father’s truck-stop chain, Pilot Travel Centers, into an empire before selling a majority stake to Berkshire.

Now, their two companies are duking it out in a Delaware court over the question of the proper accounting method for reporting PTC’s earnings. That will determine how much Berkshire could have to pay to the Haslam family’s company, Pilot Corp., to buy the 20 per cent of PTC it doesn’t yet own.

In this fencing match, the accounting rules are the blades. Pilot Corp. told the court that Berkshire took steps to make PTC look less profitable over the short-term, potentially cutting any deal’s value by as much as $US1.2bn.

Berkshire said it acted within its rights. It also alleged that Haslam tried bribing employees into inflating PTC’s near-term earnings, so Pilot Corp. would get paid more. In court filings, Pilot Corp. has denied Berkshire’s allegations, calling them “strategic inventions” and a “wild theory.” A trial on Pilot Corp.’s claims is scheduled for January. Berkshire and Pilot Corp. declined to comment beyond their court filings.

Those filings show elements common to many deal dust-ups. Incentives can get misaligned between high-level players who are supposed to be on the same team. Short-term rewards may be prioritised over long-term value, or vice versa, depending on who’s deciding.

Berkshire acquired its majority stake in PTC gradually over a six-year period. Starting in January, Pilot Corp. has an annual 60-day window in which it can require Berkshire to purchase its remaining 20 per cent stake.

If this comes to pass, the price would be set at a contractually agreed formula of 10 times the prior year’s earnings before interest and taxes, or EBIT, with some adjustments. This is the same formula the parties have used previously.

Berkshire, which paid $11 billion for the 80 per cent it owns, has an incentive for EBIT to be low. Haslam, who still sits on PTC’s board with his father, wants PTC to show higher earnings, meaning Pilot Corp.’s remaining stake would be worth more.

The case illustrates the difficulty of crafting incentives in complex corporate structures so that everyone is rowing in the same direction, said Jordan Barry, a law professor at the University of Southern California. For instance, EBIT clauses, such as the one at PTC, can have a positive influence, by encouraging growth.

Warren Buffett and truck-stop mogul Jimmy Haslam are fighting over a seemingly obscure accounting method. What’s really at stake: possibly as much as $US1.2bn ($1.82bn).

“But you do have this issue where, when you pay out based on a particular year’s EBIT, that encourages people to try and load that one year up with as much earnings as possible,” Barry said. “And if that comes at the expense of other years, that’s not good.” Barry gave a hypothetical example of how getting paid based on a multiple of 10 times EBIT could incentivise a company being bought to accept lower prices on contracts just to get them booked in the current year.

“Let’s say this contract would make you $100,000 normally, but you close this year if you’re willing to do it at $80,000,” Barry said. “That’s not usually a great trade. You just lost $20,000.” But, because the company is being sold, that contract is then worth $800,000. “That’s a great trade for you,” he said.

Profit, of course, isn’t a hard-and-fast measure. It’s an accounting construct dictated by different rules and methodologies.

In this case, the argument centres on a financial-reporting method known as pushdown accounting. When a company gets bought, it can choose whether to revalue all the assets and liabilities on its own separate set of books, in effect “pushing down” the acquirer’s purchase price and using that as the basis for the new values. The method is optional. Companies have wide discretion on whether to apply it. But if they do, the decision is irrevocable.

If a company wants to show lower profits over the short term after getting acquired, it can write up its asset values so it will show higher expenses for things like depreciation and amortisation. Pilot Corp. said Berkshire did this with PTC’s financial statements, which are separate from Berkshire’s, along with other adjustments that cut PTC’s earnings.

Pilot Corp. said Berkshire agreed not to elect pushdown accounting at PTC without Pilot Corp.’s consent. It said Berkshire began doing so anyway last March.

Berkshire confirmed that PTC applied pushdown accounting on its interim financial statements this year. It claims it had no choice.

Berkshire said PTC itself implemented pushdown accounting, while Pilot Corp. was still the controlling shareholder. It added that doing so boosted the payout Pilot Corp. received earlier this year when Berkshire upped its PTC stake to 80 per cent from about 39 per cent.

Pilot Corp. said it did no such thing. It said the first time Berkshire made this argument was after Pilot Corp. filed its lawsuit in October.

Pilot Corp. has said it was holding out for the possibility that Berkshire would agree to set the price on its 20 per cent stake as if pushdown accounting weren’t in effect. It said it decided to sue after an October 13 phone call between Buffett and Haslam’s 92-year-old father, Jim Haslam II, and an October 18 exchange of letters.

According to both companies’ versions of events, Buffett told him that when and if the Haslam family decided to exit, Berkshire would do exactly what the contract says. Pilot Corp. said the elder Haslam couldn’t get a straight answer to his question about whether Berkshire would use pushdown accounting on its year-end 2023 financial statements. It sued Berkshire on October 23.

The Wall Street Journal