8:10 p.m. | Updated
With the holidays approaching, Warren E. Buffett has found a way to stock up on elf hats and reindeer paper plates: by buying an 80-year-old retailer overflowing with them.
On Friday, Mr. Buffett's company, Berkshire Hathaway, agreed to buy the Oriental Trading Company, acquiring a catalog-based arts-and-crafts company whose wares include Santa doorknob kits and a color-your-own Christmas photo holder. Berkshire paid about $500 million, according to people briefed on the matter.
“Oriental Trading is a leader in its industry, has a strong management team and delivers exceptional customer value and service,†Mr. Buffett said in a statement. “We are delighted to have them join the Berkshire Hathaway family and continue their quest to make the world more fun.â€
The deal signals the end to a series of ownership changes for Oriental Trading, which has been passed among private equity fir ms and retooled under bankruptcy protection. Its current owners include Kohlberg Kravis Roberts, which took a big stake in it during the Chapter 11 process.
Oriental Trading was founded in 1932 by Harry Watanabe, a Japanese immigrant in Omaha who found a profitable niche in selling Kewpie dolls and other trinkets through local stores and carnivals.
His son, Terry, expanded the business enormously by bolstering a catalog business that drew in direct sales to churches and schools. Terry Watanabe sold Oriental Trading to Brentwood Associates in 2000. Six years later, Brentwood sold it to the Carlyle Group for $1 billion. K.K.R. had also looked at buying the company through its private equity unit, but was outbid.
Soon afterward, however, Oriental Trading struggled with both rising mailing costs and the recession, as well as the enormous amount of debt that was placed on the company. The company filed for bankruptcy in 2010, prompting K.K.R.'s special situation s team to consider expanding upon a small investment in the retailer's debt. The division specializes in investing in distressed companies, usually by buying debt or providing rescue financing. It currently oversees about $2 billion.
Early in 2011, the unit bought up what eventually became one-third of Oriental Trading's first-lien debt, putting K.K.R. in line to take control by converting its holdings into equity. Using knowledge gleaned by the leveraged buyout side years earlier, the team decided that the retailer appeared headed for a recovery and would make an attractive investment.
“In our view the business was stabilizing and starting to turn positive,†Jamie Weinstein, a co-head of the special situations group, said in an interview. “That was a different view from a lot of distressed investors at the time.â€
In recent months, K.K.R. and the company's other owners, Par IV Capital Management and the Crescent Capital Group, decided to look for a potential exit, according to people briefed on the process. Oriental Trading hired Lazard as an adviser to reach out to potential buyers, including Berkshire.
Given Mr. Buffett's aversion to bidding in auctions, bankers showed Berkshire a number for a potential deal, one of these people said. He accepted.
The deal has been a good one for K.K.R., which should earn twice its initial investment, according to the people briefed on the process.
Jeremiah Lane, another member of the K.K.R. team, said in a statement: “Over the past two years the company has transitioned to steady growth, both top and bottom line, and there is no question the company has a bright future as part of the Berkshire Hathaway enterprise.â€
