The Oracle of Omaha has given the cover. After investing $5 billion in Goldman Sachs on Sept. 23, he agreed to buy $3 billion of preferred perpetual shares of General Electric Co. in a similar deal.
The news came alongside the announcement of GE’s $12 billion common stock offering. In this way, GE, which gets almost half of its revenue from its finance division, joins the ranks of other financial behemoths that have been forced to tap the market to raise funds recently.
The move follows two and a half weeks of difficulty for GE CEO Jeff Immelt. After issuing a report on September 14 intended to reassure investors, GE admitted to the problems the finance unit was causing last week with several important announcements. The problems at the finance side of the conglomerate had a material impact on third-quarter results and hence full-year revenue, “reflecting unprecedented weakness and volatility in financial services markets,” the company said. company in a report. In addition, he suspended stock buybacks and said GE would maintain its dividend, but it would not be increased.
Early yesterday morning, GE’s share price, already battered by worries in recent weeks over its financial unit’s exposure to the credit crunch, fell as much as 8%, following the decline by Nigel Deutsche Bank analyst Coe of his 2008 earnings estimate of 9%, with a top-down adjustment for the 2009 outlook. Spreads on credit default swaps jumped significantly, too. According to the Wall Street Journal, citing the Phoenix associates group, it now costs $500,000 to protect $10 million of bonds for five years, up from $650,000 before the announcement.
The deal with Buffett has a 10% dividend and is transferable after three years at a minimum premium of 10%. Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock at $22.25 per share at any time over the next five years.
Immelt said in a statement that the deal is designed to increase GE’s flexibility and “allows us to execute our liquidity plan even faster.” Plus, he added, “it gives us the opportunity to play offense in this market if conditions allow.” He reiterated his commitment to maintaining GE’s AAA rating and said GE continued to meet its commercial paper needs. As the stock price fell all day, the news led to an immediate upside.
