October 2, 2008 - "Buffett Strikes Again"
Summary: Warren Buffett strikes a killer deal to invest $6 billion in General Electric. He has put over $20 billion to work in the last 3 weeks and has another $30 billion to invest with. Watch out!
The old Oracle of Omaha has cut deal strikingly similar to the deal he cut with Goldman Sachs. Here he is getting perpetual preferred stock worth $3 billion with a 10% dividend that is callable after three years at a 10% premium. He’s also snatching up warrants to purchase $3 billion of common stock at $22, which is a two dollar discount from where the stock is trading right now.
Essentially, every year for 3 years, GE will get $300 million. He was also able to buy GE at about a 10% discount to where it was trading yesterday.
Many people thought Warren Buffett had lost his touch because Berkshire Hathaway was down over 25% this year from it's highs. Today, Berkshire Hathway is even on the year, after being up over 20% last year. Certainly, this is not the last we hear of Mr. Buffett this year. I wouldn't be surprised if he makes more deals in this same structure-issuing perpetual preferred stock with a very high dividend with the option to buy warrants at a a discount price to what the stock is trading. Moreover, I wouldn't be surprised if Buffett buys a couple divisions of AIG from the US government.
With each deal Buffett does, he can put money to work that was previously earning a rate of return on Treasury Bills. He is certainly getting a much higher rate of return with these investments and the intrinsic value of his company only continue to go up.
Please note: Don't buy the stocks that Buffett buys in this format - GE and GS. He has structured a deal that we as individual investors cannot structure and limits his risk to a level that we as individual investors cannot get. Companies are willing to pay him a premium to get his seal of approval and restore confidence in their companies.
