Buffett’s Berkshire has agreed to buy 50,000 preferred shares of Bank of America for $5 billion.
He’s paying $100,000 per share. He also has options to buy 700 million shares. That’s 7% dilution for shareholders, potentially.
Buffett says it’s not just a vote of confidence in Bank of America, but in the U.S., according to Becky Quick on CNBC.
The news is also good for Wells Fargo, a mortgage lender larger than Bank of America. And for Buffett, because he is Wells Fargo’s biggest shareholder. Wells Fargo is up since the announcement.
Buffett says it’s a better deal for Bank of America than Buffett gave to Goldman Sachs in some ways. However – it’s also expensive for BofA. Buffett now has the option to buy 7% of the company as we mentioned above.
Bank of America is up 24.32% so far. But it’s still nowhere near where it was months ago.
But here’s something that might help it get there:
Word is that Treasury did not have a hand in this monumental move for Bank of America, based on Buffett’s comment that he called Brian Moynihan. UPDATE: We have confirmed that neither the White House nor the Treasury had a hand in the deal.
The news is surprising, however there was speculation that something like this might happen.
Jim Cramer predicted that there might be an angel investor situation yesterday. He suggested that Berkshire find an angel investor like Warren Buffett or Prince Alwaleed. It’s monumental for the company, he’s said on CNBC.
Here’s the press release:
Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 per cent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 per cent premium.
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.
“We are building the best franchise in financial services and we have laid out a clear plan to deliver long-term shareholder value,” said Bank of America Chief Executive Officer Brian Moynihan. “I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That’s what customers want, and that’s the company’s strategy.”