April 15, 2011 – By Ernest Scheyder
With Lubrizol and a large stake in Dow Chemical, Buffett's Berkshire Hathaway will wield enormous influence over a chemical empire that sells materials for Apple's iPad, lubricants for truck engines, Styrofoam for home construction, and thousands of other products.
And he already owns the popular Benjamin Moore paint brand.
Buffett's acquisition of Lubrizol is set to close in the third quarter, even as legal experts say Buffett's one-time heir apparent David Sokol is in danger of being slapped with insider trading charges for his role in the deal.
Buffett is already the second-largest shareholder in Dow Chemical via a series of preferred shares that he bought in 2008 when the company desperately needed cash.
And Buffett might not be done in the sector, as there are plenty of small- to mid-size chemical firms that match his investment thesis, including prodigious cash generation.
Specialty chemicals makers Solutia and Methanex are extremely attractive, industry analysts say.
"It's still a very fragmented market," said Hassan Ahmed, an analyst with Alembic Global Advisors. "Clearly consolidation needs to happen. If Buffett's going in and investing in these names and still thinking there's still value, it just signals that there is much more upside in most chemical names."
Earlier this year Buffett famously compared his desire for possible acquisitions to big-game hunting, saying his trigger finger was itchy.
Even after the Lubrizol deal closes, Berkshire likely will have more than $50 billion in cash ready to deploy by the end of this year.
To that stable he might want to add Solutia's insoluble sulfur for tires, which keeps them from disintegrating and brings in margins of about 40 percent. Solutia dominates the market for the product.
Solutia also recently signed a contract to supply heat transfer fluid to an Arizona solar power plant. That project alone could boost the company's earnings by as much as 11 cents a share by 2013, Jefferies & Co analyst Laurence Alexander said.
Methanex's methanol technology may also interest Buffett. Methanol is similar to ethanol but does not require food crops or government subsidies to produce. Just as ethanol is blended with gasoline in the United States, methanol is blended with gasoline in China, fueling a surge in demand.
Methanex is the top producer in the methanol industry.
"I think it would be a great strategic fit" for Buffett, said Raymond James analyst Steve Hansen. "It's got a very strong competitive moat and tremendous free cash flow generation.
"They're very good stewards of capital, which Buffett is a big fan of, and have bought back roughly half their shares in the past decade," Hansen said. "And we think the methanol markets are really set up for a big run here."
Berkshire Hathaway did not respond to a request for comment.
Buffett "is attracted to any operation that in his view he can understand, is predictable, has a good outlook for continued demand and growth in the future, which will in turn generate more cash," said Jerry Bruni of portfolio manager J.V. Bruni & Co, which owns Berkshire Hathaway shares.
Would that include other chemical makers?
"Given his comments about the itchy trigger finger," Bruni said, "I would be surprised if Lubrizol were the last of his proposed acquisitions."
(Reporting by Ernest Scheyder, editing by Dave Zimmerman)