Buffett makes sweet deal, B of A stock recovers

The magic Buffett touch?

Bank of America shares bounced back on news that Warren Buffett will invest $5 billion in B of A, stepping in to shore up the company in the same way he helped prop up Goldman Sachs (GS) and General Electric (GE) during the financial crisis in 2008. The news also gave a huge lift to the broader market, particularly financial stocks.

In recent weeks, investors have battered BofA’s stock on fears that the bank has yet to overcome billions of dollars in problem mortgage loans and that the bank might need to raise as much as $50 billion outside capital to cope with losses and meet new industry capital rules. According to CNBC, citing an interview with Buffett, the billionaire conceived of the investment while in the bathtub Wednesday morning and had his assistant contact BofA’s CEO Brian Moynihan to get the banker’s private number. Under the terms of the deal, BofA will sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6% annual dividend. BofA can buy back the investment at any time by paying Buffett a 5% premium. In conjunction with the agreement, Berkshire Hathaway will also receive warrants to purchase 700 million shares of BofA common stock at an exercise price of about $7.14 a share, at any point over the 10 years following the closing date of the transaction.

The deal aids BofA in restoring investors’ confidence, after losing almost half its value this year as investors speculated the lender would have to access the public markets to raise capital, while the jump in BofA’s shares also makes the warrants that Buffett received in the deal instantly profitable. Meanwhile, the European Commission has cleared the acquisition of Lubrizol (LZ) by Berkshire Hathaway. Buffett had agreed to buy the world’s largest producer of lubricant additives in March for about $9 billion.

Bank of America (BAC : NYSE : US$7.65), Net Change: 0.66, % Change: 9.44%, Volume: 854,989,986
Berkshire (BRK.A : NYSE : US$103491.00), Net Change: -2859.00, % Change: -2.69%, Volume: 627

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx

About the Author

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.

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