Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya"
Tuesday, September 23, 2008 | 10:04 PM
in Corporate Management | Credit | Finance | M&A | Psychology/Sentiment
Tonight's Goldman Sachs/Warren Buffett deal is a classic example of our post 2001 news: Looks good as a headline, is godawful underneath. Of course, futures popped on the announcement.
The WSJ subhead read "Move by Famed Investor Amid Crisis Seen as Vote of Confidence in Banking System."
Puh-leeze.
Vote of confidence? Hardly. Doubtful. It is merely an opportunistic deal, and probably a damn good one, for Berkshire Hathaway (BRK). On the other hand, for Goldman Sachs, it is a very expensive deal. If you delve beneath the headlines, you see that Warren is not so much making a vote of confidence as he is extracting pound of flesh (and then some).
Verily, let's look at the details to figure out just how much GS is paying for this capital:
• Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on $5 Billion dollars -- that's $500 million per year. And, since this is a preferred, it gets paid out of net income in after tax dollars dollars. Ouch.
• Goldman gets the right to call the preferred at any time at a 10 percent premium. Ouch again.
• Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.
If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%.
Doug Kass thinks its an even better deal for Berkshire -- goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet's net cost $3B -- so the effective yield is closer to 17%. (Ouch)
A friend points out that Goldie bought back 1.5 million shares in the quarter ending 8/31, at an average price of $180 a share. (Nice trade). I’m thinking the buyback program may be on hold for a while here.
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Bottom line: This is a terribly expensive deal, but probably a necessary one. The smart boys at 85 Broad Street did not want to wait until they were too desperate to get even a mediocre deal. They sure as hell did not want to "pull a Fuld."
This also looks like a steady stream of income for Berkshire Hathaway. And what do you want to bet me that Warren asked for -- and got -- a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman? This might even be a riskless deal for Buffett.
Vote of Confidence my ass . . .
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