Does Warren Buffett Think Goldman Is More Creditworthy Than GE? 29 comments
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9/23 - Goldman Sachs Group announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five-year term.
10/1 - GE announced that it has reached agreement to sell $3 billion of perpetual preferred stock in a private offering to Berkshire Hathaway, Inc. The perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Today's announcement that Berkshire Hathaway (BRK.A) would invest up to $6 billion in General Electric has many of the same terms as the deal Buffett announced about a week ago with Goldman Sachs. In both cases, BRK.A is receiving perpetual preferred stock with a yield of 10%, that is callable at a 10% premium. Additionally, in each case BRK.A has received warrants to buy an equal amount of stock at a price of about 5% below where each stock traded before the deal was announced.
However, there are some differences. First, Berkshire is investing $5 billion in Goldman and only $3 billion in GE. Second, while Goldman can call the preferred shares at any time, GE has to wait at least three years before they can call the preferred shares they are issuing. In other words, BRK.A is lending less money to GE than it is to Goldman and attaching more strings to that smaller investment. While the market has reacted to the investment as an endorsement of GE by BRK.A, based on these differences, one could argue that Buffett thinks GE's creditworthiness is no better than GS, even though GE is rated AAA while Goldman is rated AA-.
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This article has 29 comments:
Maybe it's time to buy BRK again.
If you think GE preferreds are a good deal, why not buy some yourself? You don't have to be a member of royalty to buy them.
On Oct 01 03:31 PM Michael D. wrote:
> He is buying preferreds. The result may be that he milks the cash
> cows for all they are worth and then leaves the empty husk for the
> common stock holders (you and me). Is this possible?
On Oct 01 03:50 PM nym wrote:
> What's the present value of $3G at 10% in perpetuity? Will GE have
> cash to call it?
Anyone who can write a cheque for $3 billion dollars on the spot can get the same terms as Buffett. But of course, for people like you, anyone more successful than you must be a conspirator and connected crony, right?
On Oct 01 03:53 PM debtacid wrote:
> Looks like Crony Capitalism is alive and well. With the stroke of
> pen, the common stock is diluted, and it’s value is transferred from
> the small investor to the politically connected Fat Cat.
Anybody who claims that Buffett has not done a great deal should go back to school and study Black&Scholes option pricing. Given an implied 5 year volatility on the GE stock of roughly 35% and the fact that they are in the money already by USD 2, gives these Calls a market value of almost USD 1.5 B. This means Bufett only paid 3-1.5= USD 1.5 B for a 10% dividend with the face value of 3 B. This leaves him with a real interest rate of 20% plus the capital gain of 120% on the preferred (3Billion +10%of 3B). All in all he earns 3 dividends at USD 900 M and is redeemed at 3.3B = USD 4.2 B.
This means he gains (4.2-1.5)/1.5 = 180% in 3 years = 60% p.a. under the assumption that the options have a fair value of USD 1.5 B. If a certain pay-off of 60% p.a. is not a good deal on preffered stocks that are more senior than normal stocks, then what is a good deal???
An impressive move on his part, but GE ends up with the short end of an expensive financing deal.
It looks like BH/Mr. Buffet made GE capital ugliness a non-issue so that GE can move on with rebuilding the infrastructure of most of the world, financed by GS.
(There is an anecdote about Mr. Buffet wanting to "own a bridge" because everyone had to use it - this reminds me of that).(Except times a zillion).
At any rate, this seems to put a floor on GE's stock price at $22.84 at the end of 5 years time, or before (the strike price for the $3B in warrants).
The three-year-to-call part is a material difference, and I'd guess is there because GS was cheaper on an expected growth basis. So in GE, BRK expects to make less on the appreciation of the warrants, so it requires additional returns from the preferred to make up the difference.