Berkshire investment in Occidental is "classic Buffett" but also rarely support a hostile bidder

Berkshire Hathaway's deposit money deposit in Occidental Petroleum is classic Warren Buffett, but it is also unusual for Berkshire to assist what can be considered a hostile takeover bid, which has mostly been abandoned earlier. 19659002] Berkshire and its founder, Buffett have played away from using Berkshire's huge money resources to make hostile deals. Two years ago, Kraft Heinz, who was supported by Buffett and private equity firm 3G, withdrew from an uninvited bid for Unilever because of Buffet's aversion to hostile deals.

In this case, Berkshire will invest $ 1[ads1]0 billion in Occidental in exchange for 100,000 shares of cumulative perpetual preferred stock, subject to Occidental's successful acquisition of Anadarko. The agreement also includes warrants to buy 80 million shares of Occidental common stock.

"The hostile component, the bidding section, is a bit strange. Berkshire has previously said they are not participating in auctions," said KBW analyst Meyer Shields. Shields said Berkshire joined Validus Holdings in trying to disrupt Allied World Assurances' bid for Transatlantic in 2011, but it didn't win.

"Berkshire Hathaway has lots of money and they have shown that they do not find that the valuations have been very convincing. It has been reluctant to buy things out there … It's 10% or less of today's money so why not? " so Shields.

By buying into a possible combined Occidental and Anadarko, Berkshire makes a huge effort on American slate. Both companies have holdings in the Permian basin. Occidental has offered $ 38 billion in stock and cash to Anadarko, and topped a previous bid by Chevron. Anadarko has entered into negotiations with Occidental, but the board so far still supports the Chevron agreement.

Buffett told shareholders just last year that Berkshire didn't have an appetite for unfriendly deals. "Well, we don't want to make hostile tenders ourselves. I don't think there is anything fundamentally wrong with the idea. I think if you take the Fortune 500 companies, I'm sure all 500 will not be ruled by the best or in Some cases even the friendliest investors in the world, Buffett said.

Buffett also said he did not think it was "bad or something to run a hostile offer to a company. It's just we don't want to, and we don't want to get into it, he said. Buffett said he likes being like the management of companies he invests in because managers will continue to run their companies. Berkshire has taken a few rare positions against the management, including one holding back for a Coca-Cola compensation plan that Buffett viewed as excessive.

Shields said that the investment in Occidental can be considered less hostile now that it is talking to Anadarko, but it is still a competitive bidding situation. Berkshire will initially be a banker of the type for the merged company, not really a party in the bidding. Nevertheless, the financial support has strengthened Occidental's share and cash offers.

Analysts have been expecting Chevron to return with another bid for Anadarko, even one that suppresses Occidental on price, but on Tuesday deleted its stock and signaled that the market looked at Occidental who now has the upper hand. Occidental, before the promise of Berkshire Cash, was seen as a weaker bidder, both because the shares were a less attractive currency than Chevron, and because the deal was contingent on the sale of assets. The company will also be more delivered as a result.

So far, Chevron keeps up with his deal. "We believe that our signed agreement with Anadarko provides the best value and security for Anadarko's shareholders," the company said.

Shields said Berkshire, which has its own large energy portfolio, may even consider a role in the sale of Anadarko assets, which may include Anadarko's deep-water and liquid natural gas stocks. Berkshire's holdings include MidAmerica Energy, which has various energy items such as pipelines, electrical transmission and wind power investments.

The funds of Occidental are just a warm-up to some very large acquisitions of Berkshire. Buffett recently told CNBC that one major was recently gone and he was very close to making a very large acquisition in the fourth quarter, but the deal fell apart.

"Berkshire has $ 90 + of cash available for acquisitions to supplement organic growth, which we expect to be immediately rising to EPS. Mr. Buffett recently said the company considered a major acquisition that was not going to meet. what kind of company it was, but that means Berkshire is still open to big deals, "Barclay's analyst Jay Gelb recently wrote.

Shield also said that the big deal could be in some industry, and Buffett does not necessarily signal a big energy buy. "It can be almost anything. It can be energy, but when we talk about over $ 100 billion in cash and they put $ 15 billion in this deal. It leaves a lot of dry powder for other things," he said. 19659002] Berkshire's interest in Occidental is not uncommon for Buffett. Going back to the financial crisis, he put money in companies like Goldman Sachs and GE, but for very different reasons.

"There haven't been dozens and dozens of these deals," Shields said. "Berkshire was able to borrow money on very attractive terms … from that point of view it's not that unusual. Of course, you have to be of the size of Berkshire to get those opportunities available."

The fact that the Occidental investment includes preferred stock makes it particularly attractive because it gives Berkshire a coupon without exposure to the company's volatility, Shield said. The preferred share will pay dividends of 8% per year, and it can be redeemed for 10 years at a strike price equivalent to 105% of the liquidity preference and any accumulated and unpaid dividends. Dividends can be paid in cash or equity-like shares.

Berkshire will also receive warrants to buy up to 80 million shares in Occidental shares at a price of $ 62.50 per share. Occidental was trading Tuesday at $ 59, of about 1.8%.