In a sign that the Bank of Berkshire remains open, no-moat Occidental Petroleum (OXY) announced April 30 that it has procured $10 billion in funding from wide-moat Berkshire Hathaway (BRK.A) (BRK.B) in connection with the financing it has put together as part of its unsolicited bid for no-moat Anadarko Petroleum (APC). While this is a classic Warren Buffett move, with Berkshire receiving 100,000 shares of 8% preferred stock and a warrant to purchase up to 80 million shares of Occidental (at an exercise price of $62.50 a share) in exchange for his seal of approval, it is not without risks.
For starters, Buffett is backing Occidental in what could end up being a bidding war with Chevron (CVX), which already approached Anadarko about a takeover. This is something he has long eschewed, noting on countless occasions that Berkshire is not interested in engaging in "unfriendly" takeovers or "auctions." Second, it is our understanding that for the deal to have originally worked out for Occidental, the company would have needed to not only divest $10 billion-$15 billion in assets (to cover part of the cash funding for the deal) but also achieve around $2 billion in run-rate cost savings (which was double the savings Chevron thought it could achieve from its Anadarko deal). While large-scale asset sales are less likely given the cash infusion from Berkshire, the premium Occidental has already offered (more than 60% over Anadarko's market value before Chevron's takeover announcement) makes a potential bidding war with Chevron the least palatable outcome.
Although we are encouraged to see Berkshire finally putting capital to work after it closed the fourth quarter of 2018 with $111.9 billion in cash ($85 billion of which we consider to be dry powder for acquisitions, investments, share repurchases, or dividends), the complexities of this deal demonstrate the level of difficulty Berkshire is having finding a good risk/reward trade-off in the marketplace.
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Greggory Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.