Buffet’s Reputation Adds Nearly $1B To BAC Deal

As Bloomberg is reporting today, “BofA Says Berkshire Will Invest $5 Billion.”

In short, Warren Buffet appears to have bailed out Bank of America.

Here are the details of the deal: Bershire’s set to infuse BofA with $5B, through which “Berkshire will get cumulative perpetual preferred stock paying a 6 per cent dividend…(as well as) warrants to buy 700 million shares at $7.14 each.”

This, of course, is an obvious vote of confidence for America’s banking industry. 

What’s even more interesting, however, is exactly HOW much Buffet’s vote is worth.

Taking a look at the specifics of pricing:

Warrant Exercise Price: $7.14  

Number of shares covered by warrants: 700,000,000  

Market Price (pre announcement): $7.02  

Post announcement price increase: 21.0%  

Market Price (post announcement): $8.49  

Value of warrants at purchase: $(86,429,752)    <— Underwater 

Value of warrants post announcement: $945,000,000 <— Buffet Premium  

In short, a quick back-of-the-envelope calculation reveals that Buffet’s reputational premium to BofA is worth $945M. That’s right.  Nearly $1B.

Looks like, based on the 21% post-announcement pop in share price, Buffet’s bet that his reputation goes a long way in a company’s recovery is, indeed, a billion dollar idea.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress.  She can be reached at [email protected]