This morning, Bank of America announced that Berkshire will use cash to buy 50,000 shares of preferred stock with a liquidation value of USD 100,000 per share in a private offering.
That is, in effect, a loan to the bank, in which it will pay around USD 300 million in dividends each year to Berkshire. Buffett had said he didn't want Goldman to buy back its preferred shares, because it cut off the stream of USD 500 million a year going from Goldman to Berkshire. In today's deal, Berkshire gets warrants to buy up to USD 5 billion of BofA's common stock, 700 million shares at an exercise price of just over USD 7.14 a share. That gives Berkshire the potential to become BofA's largest shareholder. State Street is currently at the top of that list with 460.5 million shares, about 4.5% of the bank's outstanding shares. (Berkshire sold a 5 million share stake in BofA during 2010's fourth quarter. Buffett's deal with Bank of America sent its shares as high as $8.80 this morning, for a gain of almost 26%. At that high, Berkshire's warrants had an instant "paper profit" of USD 1.16 billion.
BofA closed yesterday at USD 6.99.
As was the case with GE and Goldman, Bank of America also gets a strong endorsement from Buffett. Bank of America is focused on their customers and on serving them well. Bank of America shares rose 12.3 per cent to $7.85 in early trading, erasing some part of the stock’s August losses. The jump makes the warrants for Bank of America shares that Buffett gets in the deal instantly profitable.
Buffett and the Bank of America said he made an unsolicited call to the bank on Wednesday morning, offering to make an investment. INSTANT RETURN
Buffett’s Berkshire Hathaway will in many ways make out even better financially than the Bank of America did in the deal. Bank of America will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a six-per-cent annual dividend, it said. The bank can buy back the investment at any time by paying Buffett a five-per-cent premium.
The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out this year.
“It’s a reasonably priced deal for Buffett. Russo said any concern about the Bank of America deal tying up Berkshire capital would be more than offset by the relative lack of other good investment opportunities available.
Bank of America chief executive Brian Moynihan said on an Aug. 10 conference call that the bank could add to its capital through earnings and asset sales. Finger’s family sold its bank to Bank of America years ago.
The cost of insuring Bank of America debt against default has also been rising, but contracted Thursday after the Buffett deal, narrowing 68 basis points to 305 basis points.