NBC Universal parent General Electric announced plans to sell at least $12 billion of common stock to the public and to sell $3 billion of a new issue of preferred stock to Warren Buffett’s Berkshire Hathaway. GE’s stock had dropped earlier in the day as Wall Street became more concerned about loans by GE Capital.
Not only is Buffett immediately investing $3 billion into the preferred stock with a 10% dividend, but Berkshire is also getting warrants to buy $3 billion worth of common stock at a strike price of $22.25 per share anytime over the next five years. That price, by the way, is well below the previous day’s close of $25.50.
“GE is the symbol of American business to the world. I have been a friend and admirer of GE and its leaders for decades. They have strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come,” said Buffett in a statement released by GE.
GE stock had already fallen to around $23 before the deal was announced. Deutsche Bank analyst Nigel Coe had cut his earnings estimate for GE and lowered his target price, sparking a sell-off. Coe expects NBC Universal and some other GE units to post growth in Q3, but warned of write-downs of as much as a half-billion bucks at GE Capital due to mark-to-market rules for its loan portfolio. That had weighed on the stock price through Wednesday morning trading, but the stock ticked back up after the stock sale announcement.
CEO Jeff Immelt insists that GE remains sound. “The economic environment remains volatile. However, the company’s performance remains on track with the earnings guidance we provided last week for 2008, including third quarter financial services earnings of approximately $2 billion and industrial earnings growth of between 10 and 15 percent, excluding our Consumer & Industrial business,” he said.
“This action does two things for GE investors,” Immelt said of the stock sales to Berkshire and the public. “First, it enhances our flexibility and allows us to execute on our liquidity plan even faster. Second, it gives us the opportunity to play offense in this market should conditions allow. In addition, we remain committed to the Triple A rating and in the recent market volatility, we continue to successfully meet our commercial paper needs.”
The public offering of $12 billion in new shares is expected to be priced before the market opens this morning. The bookrunner is Goldman Sachs and GE expects that Banc of America Securities, Citi, Deutsche Bank Securities, JP Morgan and Morgan Stanley will also going in. A greenshoe equal to 15% of the offering will be available to cover any overallotments.
RBR/TVBR observation: Anyone with any knowledge of Warren Buffett knows that he watches Wall Street to see if anyone is doing something stupid, like selling stock well below what it’s worth. But this GE deal and one he announced recently with Goldman Sachs have a different twist. Berkshire has piles of capital at a time when there is little to be found from other sources. By agreeing to inject billions of that capital to help big, blue chip companies get through this tough period, Buffett is able to demand hefty dividend payments for buying preferred stock. That’s leverage you and I don’t have, so Buffett
gets a better deal than ordinary holders of common stock.