Berkshire's investment in Occidental is a "classic Buffett", but also a rare support for a hostile bidder

The Berkshire Hathaway deal for pouring money into Occidental Petroleum is classic, Warren Buffett, but it's also unusual in that Berkshire is helping out with what could be considered a public offering. 39, a hostile purchase, something he has mostly ignored in the past.

Berkshire and its founder, Buffett, have decided to stop using Berkshire's vast cash resources to make hostile deals. Two years ago, Kraft Heinz, backed by Buffett and the private equity firm 3G, withdrew from a non-invited bid on Unilever because of Buffett's dislike for contracts hostile.

In this case, Berkshire will invest $ 10 billion in Occidental in exchange for 100,000 cumulative perpetual preferred shares, depending on the success of Occidental's acquisition of Anadarko. The transaction also includes purchase warrants for 80 million Occidental common shares.

"The hostile component, the auction component is a bit odd – Berkshire has already stated that he was not participating in the auction," said Meyer Shields, a KBW analyst. Shields said Berkshire had joined Validus Holdings in an attempt to disrupt Allied World Assurance's bid for Transatlantic in 2011, without success.

"Berkshire Hathaway has a ton of money and they showed that they did not find the ratings were terribly convincing.There was a reluctance to buy things that are on the market … c & # 39% is 10% or less of his current money, so why not? "Says Shields.

By buying a possible combination of Occidental and Anadarko, Berkshire made a big bet on American shale. Both companies have interests in the Permian Basin. Occidental has made an offer of $ 38 billion in shares and cash for Anadarko, ahead of an earlier Chevron bid. Anadarko has started negotiations with Occidental, but its board still supports the agreement with Chevron.

Last year, Buffett told shareholders that Berkshire had no appetite for unfriendly transactions. "Well, we will not be making hostile bids ourselves, I do not think the idea is fundamentally wrong, I mean, if you take the Fortune 500 companies, I'm sure all 500 are not managed by the best, or in some cases, even the friendliest towards investor directions in the world, "said Buffett.

Buffett also stated that he did not think it was "an evil or anything to conduct a hostile bid for a company." It's just that we will not do it, and we do not want to talk about it, "he said. Buffett said he liked being loved by the management of the companies he invests in, as managers will continue to manage their companies. Berkshire took a few rare positions against executives, including one when she abstained from voting for a Coca-Cola compensation plan that Buffett deemed excessive.

Shields said the investment in Occidental could be considered less hostile now that it is in talks with Anadarko, but it is still a competitive market situation. In essence, Berkshire would act as a banker for the merged company, and not as a party to the bid. Nevertheless, its financial support has strengthened Western's shares and cash offers.

Analysts expect Chevron to come back with another bid on Anadarko, even a bid lower than Occidental's, but its action rebounded on Tuesday, saying the market was considering Occidental as having the upper hand. Prior to the Berkshire cash pledge, Occidental was considered a weaker bidder, both because its stock was a less attractive currency than Chevron's and its operation was conditional on the sale of assets. The company would also be more indebted accordingly.

Until now, Chevron agrees with his agreement. "We believe that our agreement with Anadarko offers the best value and the greatest certainty to the shareholders of Anadarko," said the company.

Shields said Berkshire, who owns its own energy portfolio, could even consider playing a role in selling Anadarko's assets, which could include Anadarko's deep-water and liquefied natural gas holdings. . The holdings in Berkshire include MidAmerica Energy, which owns various energy assets such as pipelines, electricity transmission networks and investments in wind energy.

Western financing is only a preparatory element for a very large Berkshire acquisition. Buffett recently told CNBC that a large group had recently escaped and was on the verge of making a very large acquisition in the fourth quarter, but the deal was broken.

"Berkshire has over $ 90 billion in cash available for acquisitions to complement organic growth, which we believe will have an immediate impact on earnings per share." Buffett recently said the company is considering an acquisition I know what kind of company it was, but that means that Berkshire remains open to large transactions, "said Jay Gelb, an analyst at Barclays.

Shields also said the big problem could affect any sector, and Buffett does not necessarily signal a big buy of energy. "It could be almost anything – it could be energy, but when we talk about more than $ 100 billion in cash and they invest $ 15 billion in this deal. It leaves a lot of dry powder for other things, "he said.

Berkshire's interest in Occidental is not unusual for Buffett. Coming back to the financial crisis, he put cash in companies like Goldman Sachs and GE, for very different reasons.

"There have not been dozens and dozens of these offers," Shields said. "Berkshire has been able to lend money on very advantageous terms … from this point of view, it is not that unusual, obviously you must be the size of Berkshire to take advantage of these opportunities. "

The fact that Western investment includes preferred stocks makes it particularly attractive in that it offers Berkshire a coupon without being exposed to the volatility of common stocks, Shield said. The Preferred Shares will earn dividends of 8% per annum and may be redeemed in 10 years at a redemption price equal to 105% of the liquidation preference and any accrued and unpaid dividends. Dividends may be paid in cash or in Western common shares.

Berkshire would also receive warrants to purchase up to 80 million common shares of Occidental at a price of $ 62.50 the action. Western was trading Tuesday at $ 59, a reduction of about 1.8%.