Warren Buffett to invest $5bn in Bank of America
Bank welcomes “strong endorsement” from billionaire financier
By CFOWorld.co.uk | CFO UK | Published 16:40, 25 August 11
BoA said recently that it does not need to raise capital but the investment is seen as providing the lender with greater stability after it wrote off $8.5 billion during its second quarter in relation to toxic loans sold by its Countrywide Financial subsidiary in the run up to the financial crisis.
The bank’s share price rose sharply on the news that Buffett was to make such a significant investment after he made an unsolicited phone call to broker the deal with its CEO Brian Moynihan earlier this week.
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” Buffett said in a statement on Thursday. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
“I remain confident that we have the capital and liquidity we need to run our business,” said Moynihan. “At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”
Buffett's Berkshire Hathaway will in many ways make out even better financially BoA did in the deal. Berkshire had a position in the bank that he sold in the fourth quarter of 2010 when the stock had an average price of $12.24.
The warrants to buy 700 million shares of common stock set to be acquired by Berkshire are priced at just over $7.14 per share, with an unusually long 10-year exercise period.
BoA will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said. The bank can buy back the investment at any time by paying Buffett a 5 percent premium.
The agreement is very similar to a deal Berkshire struck with Goldman Sachs during the depths of the 2008 financial crisis, except in the latest case the dividend is lower. The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out earlier this year.
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