The Buffett Western Accord is not an elephant but it helps

Warren Buffett no longer expects Godot.

After spending almost three years on the sidelines, the Oracle of Omaha has finally found a multi-billion dollar investment in which part of the $ 112 billion Berkshire Hathaway would be invested.

Berkshire agreed Tuesday to finance part of the takeover of its rival Anadarko Petroleum by oil and gas group Occidental Petroleum as part of the conglomerate's first major investment of $ 700 billion since its acquisition of Precision Castparts in 2016.

The deal was perceived as a blow for the billionaire investor and should bear fruit for Berkshire. In return for $ 10 billion, Occidental will issue Berkshire preferred shares at $ 800 million a year for at least the next ten years.

The capital injection could give Occidental the means to gain the support of Anadarko's board of directors by increasing the cash component of its bid, said people familiar with the operation, finally giving up its rival Chevron, who had submitted a lower bid.

Another potential benefit: if Occidental converts the offer significantly into cash, it will have to issue fewer new shares. This would allow it to avoid subjecting the redemption to the vote of its shareholders.

Having [Mr Buffett’s] the support gives a little wind to the application because they were perceived as a thunderclap in this process

With at least one major Western shareholder, T Rowe Price, already opposed to the deal and seen the underperformance of his shares since the announcement of the news of his interest in Anadarko, obtaining Shareholder approval might not be simple.

Companies are required to vote when they issue more than 20% of their outstanding shares to fund a takeover. Anadarko's board of directors wants to know with certainty that the takeover would not meet any resistance. Chevron was able to provide that confidence; its shareholders do not have the right to vote on the matter.

"Having [Mr Buffett’s] This support leaves a little to be desired as they were seen as a crush in this process, "said Ben Tsocanos, senior energy badyst at S & P Global.

It will also provide the ballast if Chevron, which earlier this year had agreed to buy Anadarko for $ 50 billion, offered a higher bid.

For Buffett, the deal partly solves the problem of knowing what to do with the $ 100 million invested daily in Berkshire Hathaway. The company recently struggled to find what Buffett calls "elephants", gigantic contracts such as BNSF, the railway, or NV Energy, the electricity supplier, which was the core of the company. Berkshire. With Occidental, Berkshire will not accept an elephant – he will not gain control of management – but an investment yielding 8% per annum looks attractive compared to cash held mainly by short-term treasury bills and low yield.

Although Berkshire has not focused on the oil and gas industry, the deal with Occidental bears the mark of Buffett's most lucrative deals. He has lent billions of dollars to companies in crisis or in dire need of capital.

During the financial crisis, ten years ago, were Goldman Sachs, Bank of America and General Electric. Companies such as Dow Chemical and Wrigley have also turned to Berkshire to finance takeovers, as has been the case for Occidental.

The preferred shares sought by Mr. Buffett in these transactions generally yield high dividends, far exceeding the dividends proposed on one of the securities in the $ 173 billion Berkshire equity portfolio.

For companies that take money, it is often one of the most expensive forms of capital. They are attracted to it, however, because it bears Berkshire's seal of approval, an badet that can not be evaluated but can calm the nerves of investors or regulators.

"We are delighted to have the financial support of Berkshire Hathaway for this exciting opportunity," said Vicki Hollub, CEO of Occidental, when she announced the investment on Tuesday.

And if Occidental's stock price were to rise in the coming years, Berkshire could be offered another billion-dollar deal through the mandates it received in the deal. If Occidental shares resume their peak in the past year, the warrants would add an additional $ 2 billion to Berkshire.

The high price that Occidental agreed to pay Mr. Buffett raised eyebrows across Wall Street because the company had already had access to capital at a much cheaper price. Occidental paid 3% of the 10-year debt it borrowed in 2016. These bonds are currently reporting 3.47%, a sign that its borrowing costs have increased somewhat.

The takeover of Anadarko would of course require additional debt, and the rating agencies have made it clear that the deal would result in a significant downgrade of Occidental's credit rating. But even in this case, the $ 19 billion it was to borrow for the acquisition should not cost 8%.

Preferred shares are considered more favorably than debt securities by rating agencies. They are situated between the bonds and the shares of a company in the structure of its capital. However, Mr. Buffett's investment is not likely to affect the credit rating.

Both S & P Global and Moody's have said that if the agreement were reached, Occidental would probably be reduced to a triple-B, clinging to its investment grade rating on one of the lowest rungs of the stock market hierarchy. ratings before a company is considered undesirable. Triple-B debt yields about 4%, according to an index managed by Ice Data Services.

Dissenting shareholders do not always succeed in their campaigns. Earlier this year, Wellington Management attempted to block the takeover of its rival Celgene by the $ 90 billion Celgene company in Brussels. Occidental is now waiting to see if other investors join T Rowe Price in his opposition to his agreement.

Regarding the shareholders and the rating agencies, it is the risk of a prolonged bidding war. In its current form, the deal would leave Occidental with a net debt of about $ 42 billion before the sale of badets. If Buffett's money were trying to increase the supply of the West, the company's leverage and its cost of borrowing would be higher.

"At the end of the day [Mr Buffett’s investment] do not move the needle on the credit indicators, which are still very stressed, "said an badyst at one of the rating agencies covering Occidental. "If that leads to a higher price, then I think we would see them as steps backwards."