Buffett Makes Sweet Profit Off Mars Investment
Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) Chairman and CEO Warren Buffett has logged a lot of wins in the wake of the late-2000s crisis. During the crisis itself, the firm served as a white knight investor to major companies with a need for a huge amount of cash, and fast. With credit conditions tight, Buffett was able to loan billions to financial institutions like Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) at high interest rates or in return for preferred stock that paid handsome dividends.
One of the companies that Berkshire lent money to was Mars Inc., which in 2008 needed to finance the $23 billion purchase of Wm. Wrigley Jr. Co. Buffett loaned Mars $4.4 billion and purchased a minority interest in Wrigley for $2.1 billion at a discount to the buyout price.
At the time, Buffett said: “Those of you who know me, know that I have been a big fan of Wrigley’s business model for many years, and I love their products. When you think of a business that’s easy to understand, with favorable long-term economics, and able and trustworthy management — you think of Wrigley. Bringing together these iconic, world-class companies combines Wrigley’s strengths with the deep resources and proven brand-building savvy of Mars and will result in a powerful force for innovation and growth in the global confectionery marketplace.”
The Wall Street Journal reports that Berkshire is set to bank a profit of at least $680 million from the deal. Berkshire sold the notes back to Mars at about 115 percent of face value plus interest.
The sale comes shortly after news that Berkshire exercised warrants for approximately 13.2 million shares of Goldman Sachs common stock worth about $2 billion — part of Buffett’s payment for loaning the bank $5 billion during the financial crisis. The deal came in the wake of the collapse of Lehman Brothers, once the fourth-largest investment bank in the United States, and was just one of several deals that Buffett made with top Wall Street banks. All told, Berkshire Hathaway extended a lifeline worth about $24 billion spread throughout the financial industry, establishing what has been one of the boldest and most successful bets on the U.S. financial sector.
Buffett’s deal with Goldman was similar to the one he struck with Bank of America. The basic structure was that Berkshire Hathaway would make a loan in exchange for preferred stock — which paid out a handsome dividend — and warrants to buy additional stock at a fixed price until some future date. Goldman Sachs redeemed the $5 billion in preferred shares at a 10 percent premium in 2011.
Buffett’s bets on the financial industry have largely paid off, and he has pocketed billions from his bullish position in the banks in the wake of the crisis. Just two years after Buffett extended a hand to Bank of America, for example, he was able to report to Berkshire Hathaway shareholders that he had booked a paper profit of $5.27 billion from the deal.