Buffett trades warrants for smaller stake in Goldman
Warren Buffett has given up his chance to become Goldman Sachs Group Inc's largest shareholder by converting his warrants into a smaller stake in the bank at no additional cost to his Berkshire Hathaway Inc .
Buffett received the warrants as part of a 2008 deal during the depths of the financial crisis, when his investment in Goldman was seen as a vote of confidence in the firm. Under that deal, Berkshire had the right to buy about 43.5 million Goldman shares - or a roughly 9 percent stake - at an exercise price of $115 per share, for $5 billion in total.
On Tuesday, Goldman announced a new deal that would give Berkshire a much smaller stake, but would not require it to commit any capital to exercise the warrants: Berkshire would convert the warrants for Goldman shares equal in value to the difference between the warrants' exercise price and the average closing price for the 10 trading days up to October 1.
At current market prices, Buffett would receive 9.2 million shares, or a 2 percent stake, making him the ninth largest investor in Goldman, according to Thomson Reuters data.
"He's basically taking the profit that he would get without having to lay out the cash," said Gregory Warren, an analyst at Morningstar who covers Berkshire Hathaway. "He just takes the shares and sticks them in his portfolio."
For Goldman, the deal was an opportunity to prevent the dilution that would have occurred had Buffett fully exercised the warrants.
The deal is "all good for Goldman," said Glenn Schorr, an analyst at Nomura who covers the bank. "And who wouldn't want (Warren Buffett) as a larger, long term shareholder?"
Goldman shares rose 0.16 percent to $146.34 in late afternoon trading. Berkshire's widely held Class B stock rose 1.3 percent to $103.68, not far off all-time highs.
"We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs," Goldman Sachs Chief Executive Lloyd Blankfein said in a statement.
Buffett, in the same statement, affirmed that Berkshire intended to retain a "significant investment" in Goldman.
VOTE OF CONFIDENCE
Buffett's investment in Goldman in 2008 cost the bank dearly. In addition to the warrants, the bank had to give Berkshire preferred stock that paid dividends of $15 a second. Goldman repurchased those shares from Buffett at a premium in March 2011.
Between that premium, the dividends the preferreds paid while he held them, a special dividend at the time of redemption, and the paper profit on the shares from the warrant deal, analysts said Buffett will potentially have made a profit of more than $3 billion on his original $5 billion investment.
Bill Smead, chief investment officer of Smead Capital Management in Seattle, said it was a good time for Buffett to take a small stake in Goldman because the investment banking business was on the cusp of an upswing in activity.
"We might be at the beginning of where investment banking and mergers-and-acquisitions and arbitrage and all those things that normally go on that Goldman Sachs makes money on - that have hardly existed over the last five years - exists again," said Smead, whose firm holds shares in Berkshire and until recently also had a position in Goldman.
"He might have been biding his time," said Smead of Buffett.
Buffett has invested in other financial services firms in recent years.
In August 2011, Berkshire Hathaway invested $5 billion in Bank of America Corp when the No. 2 U.S. bank's shares were sinking amid concerns about its capital. In that deal, Berkshire received preferred shares as well as warrants to purchase 700 million Bank of America shares at $7.14 a share over a 10-year period. The shares closed Monday at $12.40.
(Reporting by Ben Berkowitz in Boston, Lauren Tara LaCapra in New York and Rick Rothacker in Charlotte; Editing by Bernadette Baum, John Wallace, Tiffany Wu and Andre Grenon)