Buffett bets on emerging markets with Lubrizol buy

NEW YORK Mon Mar 14, 2011 5:50pm EDT

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NEW YORK (Reuters) - Billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) struck a deal to buy lubricant maker Lubrizol Corp LZ.N for $9 billion in a bet on industrial growth in emerging economies.

The deal is Berkshire's biggest since it bought Burlington Northern Santa Fe for more than $26 billion in late 2009. It extends the trend of Berkshire expanding in basic industries, which includes Buffett's recent deals for conglomerate Marmon Holdings and Israel's Iscar Metalworking.

Berkshire, which had amassed about $38 billion of cash by the end of last year, will acquire Lubrizol for $135 per share, about a 28 percent premium to its closing price on Friday. Berkshire will also assume about $700 million of Lubrizol's debt.

Lubrizol stock soared nearly 28 percent to $134.68 on Monday, while NewMarket (NEU.N), one of the chemical company's closest competitors, was up nearly 12 percent.

With the Lubrizol deal, Berkshire appears to be looking outside North America, in contrast to many of its recent acquisitions, which have focused on an expected economic revival in the United States.

Lubrizol makes lubricants for engines, especially large trucks, buses and boats. Demand for the company's products should continue to rise as shipping of goods increases around the world.

About 72 percent of Lubrizol's revenue came from its petroleum additives business last year, and about 65 percent of the company's sales were from outside North America.

"Basically all your growth in petroleum additives is going to come from emerging markets," said Davenport Research analyst Todd Vencil. "The U.S. is growing maybe 1 or 2 percent a year in the industry. Europe is stagnant. So you really are looking to China and India and places like that."

In February, the company posted a strong quarterly profit and issued a bullish forecast for 2011, signaling that demand for lubricants was improving along with the economy.

"Lubrizol is exactly the sort of company with which we love to partner -- the global leader in several market applications run by a talented CEO," Buffett said in a statement on Monday.

The current management team under James Hambrick will continue to lead Lubrizol, the companies said.

The process began toward the beginning of the year, according to sources familiar with the matter. Berkshire made the initial approach to the chemical company, one of the sources said.

Though Buffett ultimately drove the deal, David Sokol -- one of Buffett's top lieutenants -- was also involved in the process, according to the same source.

Sokol, chairman of Berkshire units MidAmerican Energy and NetJets, is seen by many as Buffett's likely successor as CEO of Berkshire.

PULLING THE TRIGGER

Just two weeks ago, Buffett told Berkshire shareholders that he was searching for new acquisitions.

"Our elephant gun has been reloaded, and my trigger finger is itchy," the 80-year-old investor wrote in his annual letter.

And with more than $29 billion left in his stockpile, Buffett can afford to hunt for more big game. He could do another deal twice the size of this one and still have his requisite $10 billion cash cushion.

For his Lubrizol purchase, Buffett is paying a premium for a company whose value had more than quadrupled since the beginning of 2009.

Still, Thomas Russo, who helps invest more than $3 billion at Gardner Russo & Gardner, said he wasn't concerned about the sticker price for the deal.

"It's certainly a full price -- especially if you think back what the opportunity could have been had they bought at the bottom of 2008 or 2009's market sell-off," said Russo, whose firm has invested some 11 percent of its holdings in Berkshire shares. "But it's all about the forward-looking returns, and I suspect that the rest of the world's demand for the products will grow."

Soleil Securities chemical analyst Mark Gulley, who does not cover Lubrizol, said he believed that in paying about 12 times expected 2011 earnings, Buffett was getting a relative bargain.

By comparison, Nalco NLC.N, another specialty chemicals company, was trading at a multiple of about 16 times forward earnings, while NewMarket's multiple was less than 10 times at Friday's close.

Wickliffe, Ohio-based Lubrizol was founded in 1928, but traces its roots as far back as the 1870s, when it began as BFGoodrich Performance Materials. It employs a staff of 6,900 worldwide and has plants in 17 countries.

Citi (C.N) and Evercore Partners (EVR.N) are financial advisers to Lubrizol.

Berkshire Class A and B shares fell about 1.3 percent on Monday.

(Additional reporting by Thyagaraju Adinarayan in Bangalore, Jonathan Stempel in New York and Ernest Scheyder in Chicago; editing by Dave Zimmerman, Maureen Bavdek, Lisa Von Ahn and Bernard Orr)

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