Wednesday, October 1, 2008

IWarren Buffett's Berkshire Hathaway Inc. will buy $3 billion in GE preferred shares

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General Electric Co. said investor Warren Buffett's Berkshire Hathaway Inc. will buy $3 billion in preferred shares and that GE plans to offer $12 billion in common stock, bolstering its cash cushion in volatile markets.

Buffett's stake will pay an annual 10 percent dividend and is callable after three years at a 10 percent premium, Fairfield, Connecticut-based GE said today in a statement. The 78-year-old investor also gets warrants to buy $3 billion of common stock with a strike price of $22.25 a share for five years. The offering and stake accelerates the plan Chief Executive Officer Jeffrey Immelt announced last week to improve finances at GE, trying to ease investors who have reduced GE's market value by more than 40 percent in a year. The vote of confidence from Buffett, who struck a similar deal with Goldman Sachs Group Inc. last month, may further burnish GE, which already has maintained top-level AAA credit ratings through the global crisis.
``It's a screaming good deal'' for Buffett, said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire and GE shares. Carret Zane added to its GE holdings today before the Buffett deal was announced. ``GE is doing this in part to show that they can. They're strong when others are weak.'' GE fell 91 cents, or 3.7 percent, to $24.57 at 3:24 p.m. in New York Stock Exchange composite trading.

Buffett, in the statement, called GE the ``symbol of American business to the world.'' Spokeswoman Jackie Wilson didn't return a message seeking comment. ``I followed the company for a very long time,'' Buffett said in an interview on GE's CNBC television network. ``These markets are offering us opportunities that weren't available six months or a year ago.'' GE has said more than once in the past month it didn't need to raise outside capital. Immelt, 52, on Sept. 25 reduced his annual profit forecast for the second time this year and suspended a $15 billion buyback program, shifting capital to protect its dividend and AAA credit rating, the highest available, as volatility in credit markets reduced profit at its finance arm. The company earlier today said it has been able to sell corporate paper and fund operations without tapping bank lines, seeking to quash speculation that led to a surge in its credit default swaps and a slump in the stock. ``You take capital when it becomes available,'' William Batcheller, director of investment management at Butler Wick & Co. in Youngstown, Ohio, said of today's news. `` This is capital that, while it may not be cheap, can be used to expand the business and improve its profitability. It's certainly going to strengthen the balance sheet.'' Bank Lines The cash supports a Sept. 25 comment from Chief Financial Officer Keith Sherin that the $62 billion in bank lines backing up its corporate paper will ``absolutely not'' be tapped, an assertion GE repeated earlier today before the Buffett announcement. The company said it has slashed its commercial paper to below $90 billion, a goal Sherin announced last week. ``We believe that GE's plan to raise up to $15 billion in cash immediately to improve liquidity is prudent, given the distress and turbulence in the global financial markets, and should serve to bolster investor confidence,'' Standard & Poor's analysts Scott Sprinzen and Robert Schulz said in a statement today. GE's debt protection costs have more than doubled the past eight days on concerns that the company will have trouble refinancing commercial paper that it uses to fund operations and will have to tap backup credit lines from its bankers, said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, before the Buffett announcement. Unlike many banks and investment firms, GE still expects to make a profit at its finance arm this year. The finance profit may exceed $9 billion, including $2 billion in the third quarter, the company said Sept. 25. Buffett, in his Sept. 23 deal with Goldman Sachs, agreed to buy $5 billion in preferred shares with a 10 percent annual dividend. He also got warrants to buy $5 billion of Goldman common stock at $115 a share. Based on the closing price on the day of the deal, he had an instant paper profit of $437 million on the warrants that day.
Investment tycoon Warren Buffett agreed Wednesday to invest three billion dollars in US conglomerate General Electric, expressing confidence in the company's long-term outlook. The move came as GE said it was selling at least 12 billion dollars in new shares in addition to the investment from Buffett, who will obtain preferred stock through his Berkshire Hathaway holding company. Buffett, who is ranked the world's second richest individual by Forbes magazine with an estimated worth of 50 billion dollars, will have an option to purchase an additional three billion dollars of the common shares. "GE is the symbol of American business to the world. I have been a friend and admirer of GE and its leaders for decades," Buffett said in a statement. "They have strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come." GE chief executive Jeff Immelt said the investment "enhances our flexibility and allows us to execute on our liquidity plan even faster" and also "gives us the opportunity to play offense in this market should conditions allow." "The economic environment remains volatile," Immelt said. "However, the company's performance remains on track with the earnings guidance we provided last week for 2008." Last month, GE, a bellwether for the US economy, slashed its earnings guidance and warned of difficult times ahead due to the global credit crunch. In July, GE announced a new "simplified" organizational structure around four core segments as it set the stage for a spinoff of its consumer and appliance businesses. GE's divisions include Technology Infrastructure, which includes health care, aviation and transportation; and GE Energy Infrastructure, making generators, wind turbines and other equipment for the energy sector. GE Capital, another of the new segments, includes financial services including commercial finance and GE Money consumer finance. GE also controls NBC Universal, the media-entertainment powerhouse that includes NBC television and Universal Pictures.

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