Goldman Sachs Group Inc will give Berkshire Hathaway Inc millions of shares in the bank in place of warrants that date to the financial crisis, a deal that saves Berkshire money upfront and reduces dilution risk for Goldman.
The deal will make Berkshire, the conglomerate led by investor Warren Buffett, one of Goldman's 10 largest shareholders.
Goldman said on Tuesday that in place of the warrants, it will give Berkshire shares reflecting the difference between the warrants' original exercise price of $115 and the average closing price of Goldman's stock for the 10 trading days up to October 1.
"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.
Berkshire received the warrants in 2008 after investing in Goldman in what was seen as a vote of confidence in the bank.
Goldman shares rose 0.9 percent to $147.43 in early trading. At that price, the structure of the deal would imply that Berkshire would receive 9.6 million Goldman shares.
The deal eliminates a dilution risk for Goldman by potentially giving Buffett a much smaller number of shares than he would have been entitled to had he exercised the warrants.
Under the original terms, Berkshire would have been able to buy about 43.5 million shares of Goldman at the exercise price. That would have represented about 9 percent of Goldman's currently outstanding stock.
The new deal also saves Buffett from having to lay out cash up front to exercise the warrants.
Berkshire's 2008 investment in Goldman was seen as a vote of confidence during the worst of the financial crisis, though it came at a cost - preferred stock that paid Buffett dividends of $15 a second. Goldman repurchased those shares from Buffett at a premium in March 2011.
Buffett has made similar - and similarly lucrative - confidence-boosting investments 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 a price of $7.14 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 Gerald E. McCormick, Bernadette Baum and John Wallace)