Buffett dives into GE amid "economic Pearl Harbor"

NEW YORK (Reuters) - Warren Buffett’s $3 billion commitment to General Electric Co is the latest attempt by perhaps the world’s most revered investor to dive into a beaten-down company he believes has staying power, despite a global credit crisis he calls an “economic Pearl Harbor.”

Investor Warren Buffett listens to a question during a news conference in Madrid May 21, 2008. REUTERS/Andrea Comas

The billionaire’s insurance and investment company Berkshire Hathaway Inc announced the preferred stock investment as GE, whose shares have slid about one-third this year amid concern over its financial services operations, set plans to sell $12 billion of common stock.

It came just eight days after Berkshire invested $5 billion in Goldman Sachs Group Inc in a similarly structured transaction.

Buffett admitted that both investments could backfire if the U.S. Congress fails to pass a proposed $700 billion plan to help the nation’s banking industry reduce its stockpile of bad mortgages and other debt. Unlike much of corporate America right now, Berkshire does not need to borrow to do big deals.

“What Buffett has been waiting for years is finally happening: a period of sufficient market distress where he can negotiate terrific financial terms for Berkshire,” said James Armstrong, president of Henry H. Armstrong & Associates in Pittsburgh. “He has been waiting for this for 10 years.”

Omaha, Nebraska-based Berkshire agreed to buy $3 billion of GE perpetual preferred shares with a 10 percent dividend, generating $300 million of income a year.

Berkshire also gets warrants to buy $3 billion of GE common stock within five years at $22.25 per share, below its current level, and near the 5-1/2 year low it set on Sept 18.

“General Electric is the backbone of American industry,” Buffett said on CNBC television. “They’ve become tainted as every company is that has to borrow a lot of money all the time. They’re going to be around in five or 10 or 100 years from now and, if you buy at the right time, you’ll probably make some money.”

The Goldman investment included $5 billion of preferred shares with a 10 percent dividend and warrants to buy $5 billion of common stock at a discount.

GE shares closed down $1 at $24.50 on Wednesday, giving Berkshire a roughly $330 million paper profit on the warrants. The Class A shares of Berkshire rose $6,400 to $137,000.


Berkshire is a $213 billion conglomerate with some 76 businesses that sell such things as insurance, ice cream, paint and underwear and which invests in stocks such as Coca-Cola Co and Wells Fargo & Co.

Buffett, 78, generally seeks undervalued companies with strong management. GE had been a relatively small investment for Berkshire, which ended June with 7.78 million common shares valued at $207.6 million.

“It seems like we’re hitting the apex of the financial crisis and he’s always said that, when people are the most worried, he gets the most excited from an investment point of view,” said Steven Check, chief investment officer of Check Capital Management Inc in Costa Mesa, California.

Buffett has been deploying Berkshire’s cash quickly in recent weeks, after having reduced it to $31.16 billion as of June from $44.33 billion at year end.

Last month, his MidAmerican Energy Holdings Co affiliate agreed to buy power supplier Constellation Energy Group Inc for $4.7 billion, and 10 percent of Chinese battery maker BYD Co Ltd for $230 million. And Berkshire will commit $6.5 billion to Mars Inc’s purchase of chewing gum maker Wm Wrigley Jr Co, expected to close in a few days.


While Buffett told CNBC he will not let Berkshire’s cash stake fall below $10 billion, he has said he would raise cash for new investments by selling existing stock or bond holdings. He even offered to commit $7 billion to the Wall Street bailout.

“When credit is as frozen as it has been and when banks are unwilling to lend to each other, and when 8 percent of deposits in American banks have had to be moved in the last couple of weeks to solvent institutions ... this is an economic Pearl Harbor,” he told the network.

“If the United States Treasury offered me the chance to have a 1 percent participation in the profit or loss in the $700 billion they’re going to spend, and if they buy the assets at market prices, I would feel I’d made myself a very sweet deal,” he added.

The 10 percent dividend on the GE preferred shares is a higher yield than investors usually get from owning GE, which also makes such things as appliances, jet engines and light bulbs, and which also owns the NBC television network.

GE’s common stock has a 5.1 percent dividend yield. And the 10-year notes that General Electric Capital Corp sold in April then yielded 5.66 percent; the yield is now nearer 8 percent.

“Shrewd as can be, buying the highest quality companies and getting paid 10 percent plus warrants,” said Carl Kaufman, a portfolio manager at Osterweis Capital Management in San Francisco. “Almost seems unfair.”

Additional reporting by Scott Malone in Boston and Herbert Lash in New York; Editing by Andre Grenon