Rachel Layne and Erik Holm
Oct. 1 (Bloomberg) — General Electric Co. got a $3 billion investment from Warren Buffett and said it will sell $12 billion in common stock, gathering more cash to fund operations amid the worst U.S. financial crisis since the Great Depression.
Buffett’s Berkshire Hathaway Inc. will buy $3 billion in preferred shares that pay an annual 10 percent dividend and are callable after three years at a 10 percent premium, Fairfield, Connecticut-based GE said today in a statement. The 78-year-old investor also gets warrants to buy $3 billion of common stock with a strike price of $22.25 a share for five years.
The offering and stake accelerates the plan Chief Executive Officer Jeffrey Immelt announced last week to raise cash and help ease the concerns of investors who have reduced GE’s market value by more than 40 percent in a year. The vote of confidence from Buffett, who struck a similar deal with Goldman Sachs Group Inc. last month, may further burnish GE, which already has maintained top-level AAA credit ratings through the global crisis.
“It’s a screaming good deal” for Buffett, said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire and GE shares. Carret Zane added to its GE holdings today before the Buffett deal was announced. “GE is doing this in part to show that they can. They’re strong when others are weak.”
GE fell $1, or 3.9 percent, to $24.50 at 4:15 p.m. in New York Stock Exchange composite trading, after earlier declining as much as 15 percent as investors speculated about its health.
GE and Immelt, 52, told investors as recently as Sept. 25 there was no need for outside capital, including selling a large equity stake to an outside entity. Immelt that day reduced his annual profit forecast for the second time this year. He also suspended a $15 billion buyback program, shifting capital to protect GE’s dividend and AAA credit rating as volatility in credit markets reduced profit at its finance arm, GE Capital
Since then, the failure of Washington Mutual Inc., the sale of Wachovia Corp. to Citigroup Inc., and the failure of Congress to pass an economic-rescue package changed conditions enough for GE to look outside, spokesman Russell Wilkerson said.
“Since we updated investors last Thursday, a lot has changed in the world,” Wilkerson said. “The announcement today addresses the changes in the current environment.”
Buffett, in the statement, called GE the “symbol of American business to the world.” Spokeswoman Jackie Wilson didn’t return a message seeking comment.
“I followed the company for a very long time,” Buffett said in an interview on GE’s CNBC television network, adding that he was approached about GE by Goldman Sachs, which is managing the transaction. “These markets are offering us opportunities that weren’t available six months or a year ago.”
Credit Default Swaps
Credit-default swaps protecting against a GE Capital default for five years soared to as high as 740 basis points before dropping back to 540 basis points after the news, according to broker Phoenix Partners Group. They ended the day at 550 basis points yesterday, Phoenix prices show.
Even before today, GE’s credit-default swaps were trading as though the company were rated below investment-grade, according to data from the capital markets research group at Moody’s Investors Service. The contracts were trading as if the company were rated B1 by Moody’s, 13 grades lower than its top Aaa rating.
GE earlier today said it has been able to sell corporate paper and fund operations without tapping bank lines, seeking to quash speculation that led to a surge in its credit default swaps and a slump in the stock.
`Strengthen the Balance Sheet’
“You take capital when it becomes available,” William Batcheller, director of investment management at Butler Wick & Co. in Youngstown, Ohio, said of today’s news. “This is capital that, while it may not be cheap, can be used to expand the business and improve its profitability. It’s certainly going to strengthen the balance sheet.”
The cash supports a Sept. 25 comment from Chief Financial Officer Keith Sherin that the $62 billion in bank lines backing up its corporate paper will “absolutely not” be tapped, an assertion GE repeated earlier today before the Buffett announcement. The company said it has slashed its commercial paper to below $90 billion, a goal Sherin announced last week.
“We believe that GE’s plan to raise up to $15 billion in cash immediately to improve liquidity is prudent, given the distress and turbulence in the global financial markets, and should serve to bolster investor confidence,” Standard & Poor’s analysts Scott Sprinzen and Robert Schulz said in a statement today.
Unlike many banks and investment firms, GE still expects to make a profit at its finance arm this year. The finance profit may exceed $9 billion, including $2 billion in the third quarter, the company said Sept. 25.
Even so, GE’s debt-protection costs have more than doubled the past eight days on concerns that the company will have trouble refinancing commercial paper that it uses to fund operations and will have to tap backup credit lines from its bankers, said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, before the Buffett announcement.
Goldman, Sachs & Co. will manage the sale, GE said. The company said it also expects Banc of America Corp., Citigroup Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Morgan Stanley will be additional bookrunners.
Buffett, in his Sept. 23 deal with Goldman Sachs, agreed to buy $5 billion in preferred shares with a 10 percent annual dividend. He also got warrants to buy $5 billion of Goldman common stock at $115 a share. Based on the closing price on the day of the deal, he had an instant paper profit of $437 million on the warrants that day.
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Last Updated: October 1, 2008 17:08 EDT