What can you say about the man.. look at his forays over the last couple of weeks while the rest of the financial world were biting their finger nails.
Warren Buffett literally swooped in to buy Constellation Energy Group for $4.7 billion. At the beginning of the year, Constellation traded for over $100 and now its shares had slumped below $25 prior to Buffett’s acquisition announcement. At a $26.50 take-over price, Buffett is paying about an $11.5 billion price tag for Constellation, including net debt and retirement obligation. EBITDA: $1,925 million, which means Buffett paid less than 6 times EBITDA for Constellation. By the way, property, plant and equipment [PPE] are worth $10.4 billion alone.
When we say cash is king, its pretty useless not to deploy the cash when valuations get out of whack. The cash is not really king, because you did not deploy them at the right time. To be fair, the trouble is most of us do not know when the right time is. Maybe we all can follow Buffett. Mathematically alone, he has been through more crisis, booms and busts. The funny thing is that Buffett can roll a six 9 out of 10 times, but even now when he starts to buy, most investors still fear jumping along with him. Fear still over-rides sensible deduction.
The other deal was Goldman Sach. That deal is not as "committed" as it appears. The $5 billion deal involves two parts:
1) $5 billion in preferred stock These preferred shares are senior to common stock and pay a 10% annual dividend. Think of them as unsecured bonds paying 10% interest. He is not buying common shares with the initial $5 billion. If Goldman ever wants to retire these preferred shares, the company has to pay Buffett a 10% premium to their face value. That would further boost the yield on those papers. Buffett got a wonderful deal because these papers are usually callable at par and not at a premium.
2) Warrants to buy $5 billion of common stock at $115 per share Buffett has the option to buy $5 billion of common stock at $115 per share at any time over the next five years. There is absolutely no risk for Buffett on these warrants, the option cost him nothing. Buffett earns a profit of $43 million for every dollar GS stock trades above $115 per share.
The only thing Buffett is confident on is that Goldman Sachs will be around 5 years from now, and that he has a very good chance to get back his money plus a high yield. His equity interest in Goldman Sach cost him zilch, what a wonderful deal (for him).
Berkshire Hathaway also disclosed that it has doubled its stake in Conoco Phillips to 17.9M shares and picked up new positions in General Electric totalling 7.8 million shares, and a smallish stake in United Parcel Service (1.4 million shares).
General Electric is getting $3 billion in new capital from Buffett's Berkshire Hathaway. GE is "the backbone of the American industry," Buffett said. "They're going to be around five or 10 or 100 years from now." Buffett's deal is very similar to the one he got when he bought into Goldman Sachs last week and very, very different from what the normal investor would get.
Buffett is getting $3 billion in perpetual preferred stock offering a dividend of 10 percent. It is callable, at a premium of 10 percent, in three years. He also got warrants to buy $3 billion in common shares at $22.25 over three years.
Both the GE and Goldman deals does not present big risk to Buffett, but the moves send a very strong signal to all with capital that is it OK to start injecting capital into troubled firms. Buffett has also mentioned a few important points during his CNBC interview last night. One, that he would have liked to take up 1% or $7bn in the bailout fund as he believes that the fund will make good money within a few years. Two, he also reiterated that the fund is very likely to be crucial for the American economy and should make money in the end, thus an important view to the politicians who later voted the bailout plan through.
Will other investors get such a good deal like Buffett? Probably not, the SWFs and PE firms are probably gnashing their teeth on the wonderful deals struck by Buffett. But Buffett is bringing more than just cash to the table. When he invests, he brings with it a "seal of approval" on the company's fundamentals, valuations and prospects relative to its price. That seal of approval is from years of proven track record. When Buffett buys, it basically means your company is more than OK. Its a great premium to pay to Buffett by GE and Goldman as the premium is a very cheap way to restore confidence in yoru stock, boost employees' morale, and even get banks to trust your company and give out generous lines of credit.
Its not just in the US, Buffett has started to buy in Asia as well. On Monday, a subsidiary of Warren Buffett's Berkshire Hathaway spent $230 million on a 10% stake in Chinese rechargeable battery manufacturer BYD Company. Interesting indeed.
To Buffett, its time to get back in.