To The Moon

Background

• Warren Buffett, CEO of Berkshire Hathaway, is renowned for his long-term investment strategy and reluctance to sell subsidiaries. In his 2024 shareholder letter, Buffett wrote: "Berkshire almost never sells its subsidiaries unless we believe their problems will be endless."

• However, according to the Wall Street Journal, $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ is in advanced negotiations with $Compass, Inc.(COMP)$ regarding the sale of Home Services of America, one of the largest real estate brokerage firms in the United States. The deal could be worth billions of dollars.

• Buffett has been net selling stocks for nine consecutive quarters, with cash reserves reaching a historic high, while also selling rare subsidiaries. What are his plans?

Reasons for the Potential Sale

• In 2024, like the broader real estate brokerage industry, Home Services of America was hit by a housing shortage and high prices. The company reported an operating loss of $107 million in 2024, compared to a net profit of $13 million in 2023 and $100 million in 2022. Part of the 2024 loss stemmed from a lawsuit settlement requiring the company to pay $250 million in real estate brokerage commissions over four years.

• Another notable aspect is that Home Services of America, as an industry-leading brokerage firm, is well-positioned to benefit from a recovery in real estate sales.

• Although the valuation of Home Services of America is unclear due to its near break-even operations, Barron's estimates that it is worth less than the larger Compass. Despite this, the transaction amount is negligible compared to Berkshire's $1.1 trillion market value. However, given the size of both companies, the deal may face antitrust scrutiny.

Implications of the Sale

• If the sale of Home Services of America is completed, it could signal that Berkshire is restructuring by selling off smaller, non-core business units to streamline operations. This move could not only make the company easier to manage but also pave the way for Buffett's potential successor, Berkshire executive Greg Abel.

Company Background

• Compass also failed to turn a profit on a GAAP basis last year, but the company reported generating $150 million in cash flow in the fourth quarter before deducting industry-wide lawsuit settlement payments.

• According to Berkshire's 10-K annual report, Home Services of America operates 48 brands with approximately 37,700 real estate agents across nearly 820 brokerage offices. Additionally, the company manages over 1,400 brokerage offices and approximately 44,700 third-party agents through 270 franchises under two major brands.

• Chris Bloomstran, head of Semper Augustus Investments Group, which closely monitors Berkshire, estimates that the brokerage business has an annual sales volume of about $125 billion. This business is part of Berkshire's large utility division, Berkshire Hathaway Energy.

• To date, neither Berkshire nor $Compass, Inc.(COMP)$ has made any public comments on the matter. The news has driven $Berkshire Hathaway(BRK.B)$ 's stock up by 1.6% overnight.

  

• Over the past year, $Compass, Inc.(COMP)$ 's stock price has surged by 144%, reaching a market value of $4.7 billion.

  

Conclusion

• The potential sale of Home Services of America marks a significant development for both Berkshire Hathaway and the real estate brokerage industry. Although the transaction may face regulatory review, it could herald a new era for the company and the industry. As more details of the deal emerge, investors and industry observers will closely monitor its impact on Berkshire's future performance and the broader real estate market.