Interesting reports on Warren Buffett’s tax-wise acquisition of the Israeli company Iscar:

Globes:  Buffett’s Bargain: Think Warren Buffett Is Paying $4 Billion for Iscar? Think Again, by Avishay Ovadia: 

This brings us to the investment in Iscar. On the face of it, Buffet paid $4 billion for 80% of the Israeli metal cutting toolmaker company. Why only on the face of it? Because in actual fact, the sum was a great deal lower.

While the structure of the deal is not known, it seems that Buffett has set up a local company that will acquire 80% of the activity of Iscar from the Iscar group, controlled by the Wertheimer family. The family will retain control over the old Iscar, which will own 20% of the activity. In the next stage, a company will be formed, into which Iscar’s activity will be transferred (by both sides), leaving Buffett with an 80% stake in the new company, which will take in all Iscar’s activity.

Buffett, therefore, is buying activity, rather than company stock. The significance for tax is a benefit of around $1 billion over a 10 year period. Why? Because income tax regulations allow the recognition of amortization of goodwill on deals for acquisition of current activity at an annual rate of 10% of the goodwill. Almost all the sum paid for Iscar’s activity will be attributed to goodwill, resulting in an annual tax-deductible expense of $400 million. This expense will generate a tax saving of $100 million, assuming an effective tax rate of 25% for Iscar (for which it qualifies as a company with approved enterprise status). $100 million over 10 years is the expected saving, amounting to $1 billion.

That’s not all. Buffett will probably be granted (quite rightly) strategic investor status. This will mean that (subject investment in plant), any increase in profit is tax free, and there will also be no tax on capital gains or dividend distributions for 10 years. Iscar’s current profits are estimated at $400 million; the benefit for Buffett will amount to several hundred million dollars at least.

To sum up: Buffett is actually getting 80% of Iscar for around $2.5 billion. Iscar’s value for Buffett will therefore total $3 billion, giving a profit multiple of 7.5, compared with multiples of 20 and 30 that his other companies have. This is why the legendary investor didn’t even bother to come to Tefen to close the deal. Anyone would have seized the opportunity.

For Wall Street Journal coverage, see here and here.  (Hat Tip: Michael Knoll.)