Frothy markets turn dealmaker Warren Buffett into a bankroller

(Reuters) – For Warren Buffett, when all else fails, repeat what works.

FILE PHOTO: Warren Buffett, CEO of Berkshire Hathaway Inc, on the firm annual assembly weekend in Omaha, Nebraska U.S. May 6, 2018. REUTERS/Rick Wilking/File Photo

Berkshire Hathaway Inc’s plan to inject $10 billion into Occidental Petroleum Corp’s takeover bid for Anadarko Petroleum Corp extends Buffett’s technique of extracting high-yielding most popular shares and inventory warrants to fatten his firm’s backside line.

The transfer got here because the billionaire slogs by means of the fourth 12 months of a drought find main acquisitions for Berkshire, which ended 2018 with practically $112 billion of money.

Berkshire already owns greater than 90 companies resembling auto insurer Geico, BNSF railroad and Dairy Queen ice cream.

“This is one of the best things Berkshire could do,” mentioned Steven Check, president of Check Capital Management Inc in Costa Mesa, California, which invests one-sixth of its $1.5 billion of property in Berkshire. “This is a template for a model that has been very good for the company.”

Berkshire didn’t instantly reply to a request for remark.

Occidental supplied final week to purchase Anadarko for $38 billion, topping the $33 billion that Chevron Corp had agreed to pay.

The corporations are battling for Anadarko’s prized property in West Texas’ Permian shale oil subject. Anadarko mentioned on Monday it had agreed to begin negotiations with Occidental.

Buffett entered the battle two months after he mentioned in his annual shareholder letter that acquisitions of entire corporations didn’t look imminent as a result of costs have been “sky-high for businesses possessing decent long-term prospects.”

He will doubtless be questioned about Occidental and Berkshire’s money at his firm’s annual assembly on Saturday in Omaha, Nebraska, which usually attracts greater than 40,000 individuals.

“This transaction falls short of an outright acquisition by BRK, something the market is craving,” CFRA Research analyst Cathy Seifert wrote. She charges Berkshire a “hold.”


Buffett has been seen because the international monetary disaster as a lender of final resort to blue-chip corporations wanting a monetary enhance and his imprimatur.

From 2008 to 2011, Berkshire invested greater than $25 billion in high-yielding shares and bonds of such corporations as Bank of America, Dow Chemical, General Electric, Goldman Sachs and Harley-Davidson.

Occidental follows that template.

Berkshire would purchase $10 billion of most popular inventory throwing off $800 million of dividends yearly for not less than 10 years.

The eight % payout is roughly double the yields on Occidental’s longer-term debt.

Buffett would additionally get warrants to purchase as much as 80 million Occidental shares at $62.50 every, four % above their Monday closing value.

Analysts mentioned Berkshire’s financing seemed costly for Occidental however may assist it purchase Anadarko with out taking up an excessive amount of leverage.

“We are thrilled to have Berkshire Hathaway’s financial support,” Occidental Chief Executive Vicki Hollub mentioned.

And for Buffett, concern of overpaying could also be allayed by the dividends and the information that as a most popular shareholder he ranks forward of widespread stockholders if one thing goes incorrect.

The Bank of America funding has been amongst Berkshire’s most profitable in recent times.

In 2017, Berkshire exercised warrants to accumulate 700 million widespread shares, which it paid for by swapping $5 billion of most popular shares it had purchased six years earlier.

By the tip of 2018, Berkshire owned 918.9 million Bank of America shares value $22.6 billion, its largest widespread inventory funding aside from Apple, and sat on an $11 billion revenue.

Other investments have been much less profitable.

Berkshire obtained since-redeemed most popular inventory in Kraft Heinz when that packaged meals firm was created in a 2015 merger.

But in February, Berkshire took a $three billion writedown on its 26.7 % stake in Kraft Heinz, which did not adapt to altering shopper tastes. Buffett has mentioned Berkshire overpaid within the merger.

Reporting by Jonathan Stempel in New York; Editing by Cynthia Osterman

Our Standards:The Thomson Reuters Trust Principles.

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