GE to Buy Back Berkshire Hathaway’s Financial Crisis Stake

By: EW News Desk Team   Date: 14 September 2011

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EW News Desk Team

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14 September 2011

General Electric Co. has announced its intention to repurchase Berkshire Hathaway Inc’s US$3.3 billion stake in the multi-conglomerate, which was bought during the heights of the 2008 financial crisis.

GE said in a regulatory filing on Tuesday that it had mailed its offer to Berkshire, which is based in Omaha, Nebraska. The $3.3 billion price for the shares includes a 10 percent premium, after Berkshire had invested US$3 billion in GE in October 2008.

The initial investment by Berkshire is said to have been crucial in stabilising GE’s finances, as well providing GE with a vital boost for investors’ confidence.

Apart from investing in GE, Berkshire, led by Warren Buffett, had also picked up a US$5 billion stake in Goldman Sachs during the financial crisis. Earlier this year, Goldman successfully returned Buffett’s US$5 billion investment topped up by an additional US$500 million premium.

Similarly, Buffett will be able to receive back his principal, a US$300 million bonus, plus any accrued and unpaid dividends, by October 17th, according to a regulatory filing by GE.

The repayment marks a significant step for GE Chief Executive Jeff Immelt after the debacle of the 2008 financial crisis. The troubled period saw GE lose its triple-A credit rating, cut its dividend and suffer a deep drop in its share price.

“General Electric proved to be vulnerable to the financial crisis in 2008, as the group had sizable troubled assets and was too dependent on funding through the commercial paper market,” said Henk van Tulden, an analyst with Financiele Diensten Amsterdam, as quoted by The New York Times. “The company reacted by restructuring, downsizing and stabilizing its financial division.”

Buying back Berkshire’s stake will allow GE to concentrate on using cash in the near term to repurchase common shares and increase the dividend.

“This will allow them more flexibility to potentially increase the dividend,” said Nicholas Heymann, an analyst with William Blair & Co. in New York, to Bloomberg.

While the repurchase will see Berkshire’s earning power “significantly reduced”, according to an investor note written by Buffett in early February, Berkshire looks set to profit from yet another deal with Buffett striking a deal to invest US$5 billion in Bank of America Corp. Bank of America will pay Buffett 6 percent annual dividends, or US$300 million. Bank of America will also owe Buffett a 5 percent premium when it buys back his preferred stock.


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