Meet Warren Buffett, everybody’s new favorite banker.
The investing guru’s conglomerate, Berkshire Hathaway Inc., announced a deal on Tuesday, but not the kind Buffett’s fans have been awaiting. Instead of taking over a company, Berkshire is helping one business go after another. It’s investing $10 billion in Occidental Petroleum Corp. to finance the oil producer’s $55 billion acquisition of Anadarko Petroleum Corp.
The funds are contingent upon the merger getting done. Should that happen, Berkshire will hold 100,000 shares of preferred stock that will pay a whopping 8 percent annual dividend – or $800 million. Berkshire will also receive a warrant to buy up to 80 million Occidental common shares for $62.50 apiece. To put those figures into perspective, Occidental’s dividend yield is currently 5.2 percent. Its average share price over the last 20 trading sessions was $64.59, and analysts see it rising to about $74 over the next year.
Needless to say, it’s a very attractive deal for Berkshire, as Buffett struggles to find takeover targets of his own and looks for other ways to put some of the company’s $112 billion cash hoard to use. The deal also bears resemblance to Berkshire’s role in the creation of Kraft Heinz Co., one of Buffett’s most notable deals of the last few years. The investor helped bankroll 3G Capital’s buyout of H.J. Heinz in 2013, followed by the merger of Kraft and Heinz in 2015. Berkshire collected a 9 percent dividend on those preferred shares, which equated to $720 million annually. (Kraft Heinz redeemed them the following year for cheaper financing). Just like Occidental, Kraft Heinz would become a heavily indebted company, but it was a merger that Buffett believed in and where he saw an opportunity to make a fat return quickly.(1)
Buffett has made other similar moves in the past, too, but those tended to be more distressed situations. Eight years ago, when Bank of America Corp.’s shares had taken a hit amid probes related to the housing crisis, Berkshire invested $5 billion in exchange for preferred stock and warrants. The bank’s share price has surged 300 percent since then, and Berkshire is now the largest holder of its common stock.
The extra-sweet terms Berkshire secured from Occidental show how eager the oil company is to beat out rival bidder Chevron Corp. for Anadarko, which has assets in the prolific Permian Basin shale field that straddles Texas and New Mexico. As my colleague Liam Denning wrote earlier this month, the transaction would come down to which suitor’s currency Anadarko investors would prefer to end up with, since both offers are a mix of cash and stock. Going with Occidental, the smaller of the two companies, is the riskier path as a deal would require it to meaningfully stretch its balance sheet.
Buffett is only willing to take the stake in Occidental if the deal goes through, which seems likely. As CNBC reported, Chevron was unlikely to raise its offer even before Buffett’s intervention. Chevron rose 3 percent on the news, while Occidental dropped 4 percent – those moves alone are telling. It may turn out to be another case, like Kraft Heinz, where the outcome for common shareholders could turn out quite differently than it does for Berkshire.
Occidental isn’t the “elephant” Buffett and his followers have hoped for, but it’s still classic Buffett. It’s also a reminder that even if he doesn’t find a big acquisition soon, plenty of companies will happily throw money at Berkshire just to get Buffett’s seal of approval.
(1) While Berkshire has made out handsomely with Kraft Heinz despite the stock falling more than 20 percent this year, Buffett did recently admit to overpaying for the deal. That wasafter Kraft Heinz disclosed a $15.4 billion writedown, cut its dividend and showed moresigns that it’s been overly focused on financial engineering and not investing enough in product innovation to keep its brands competitive. Buffett may shed more light on both thistransaction and the Occidental dealduring Berkshire’s annual shareholder meeting this weekend in Omaha, Nebraska.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
© Copyright 2022 Bloomberg L.P. All Rights Reserved.