April 30, 2019
By Jonathan Stempel
(Reuters) – For Warren Buffett, when all else fails, repeat what works.
Berkshire Hathaway Inc’s plan to inject $10 billion into Occidental Petroleum Corp’s takeover bid for Anadarko Petroleum Corp extends Buffett’s strategy of extracting high-yielding preferred shares and stock warrants to fatten his company’s bottom line.
The move came as the billionaire slogs through the fourth year of a drought in finding major acquisitions for Berkshire, which ended 2018 with nearly $112 billion of cash.
Berkshire already owns more than 90 businesses such as auto insurer Geico, BNSF railroad and Dairy Queen ice cream.
“This is one of the best things Berkshire could do,” said Steven Check, president of Check Capital Management Inc in Costa Mesa, California, which invests one-sixth of its $1.5 billion of assets in Berkshire. “This is a template for a model that has been very good for the company.”
Berkshire did not immediately respond to a request for comment.
Occidental offered last week to buy Anadarko for $38 billion, topping the $33 billion that Chevron Corp had agreed to pay.
The companies are battling for Anadarko’s prized assets in West Texas’ Permian shale oil field. Anadarko said on Monday it had agreed to start negotiations with Occidental.
Buffett entered the battle two months after he said in his annual shareholder letter that acquisitions of whole companies did not look imminent because prices were “sky-high for businesses possessing decent long-term prospects.”
He will likely be questioned about Occidental and Berkshire’s cash at his company’s annual meeting on Saturday in Omaha, Nebraska, which typically draws more than 40,000 people.
“This transaction falls short of an outright acquisition by BRK, something the market is craving,” CFRA Research analyst Cathy Seifert wrote. She rates Berkshire a “hold.”
LENDER OF LAST RESORT
Buffett has been seen since the global financial crisis as a lender of last resort to blue-chip companies desiring a financial boost and his imprimatur.
From 2008 to 2011, Berkshire invested more than $25 billion in high-yielding stocks and bonds of such companies as Bank of America, Dow Chemical, General Electric, Goldman Sachs and Harley-Davidson.
Occidental follows that template.
Berkshire would buy $10 billion of preferred stock throwing off $800 million of dividends annually for at least 10 years.
The 8 percent payout is roughly double the yields on Occidental’s longer-term debt.
Buffett would also get warrants to buy up to 80 million Occidental shares at $62.50 each, 4 percent above their Monday closing price.
Analysts said Berkshire’s financing looked expensive for Occidental but could help it buy Anadarko without taking on too much leverage.
“We are thrilled to have Berkshire Hathaway’s financial support,” Occidental Chief Executive Vicki Hollub said.
And for Buffett, fear of overpaying may be allayed by the dividends and the knowledge that as a preferred shareholder he ranks ahead of common stockholders if something goes wrong.
The Bank of America investment has been among Berkshire’s most lucrative in recent years.
In 2017, Berkshire exercised warrants to acquire 700 million common shares, which it paid for by swapping $5 billion of preferred shares it had bought six years earlier.
By the end of 2018, Berkshire owned 918.9 million Bank of America shares worth $22.6 billion, its largest common stock investment other than Apple, and sat on an $11 billion profit.
Other investments have been less successful.
Berkshire received since-redeemed preferred stock in Kraft Heinz when that packaged food company was created in a 2015 merger.
But in February, Berkshire took a $3 billion writedown on its 26.7 percent stake in Kraft Heinz, which failed to adapt to changing consumer tastes. Buffett has said Berkshire overpaid in the merger.
(Reporting by Jonathan Stempel in New York; Editing by Cynthia Osterman)