Holding company Berkshire Hathaway (BRKB) has agreed to buy Lubrizol (LZ), a producer of chemicals for pharmaceutical companies, fuel additives for gasoline and diesel, and other ingredients for the transportation industry. Warren Buffett, the legendary investor and CEO of Berkshire, recently mentioned that he was aggressively seeking a large acquisition, and this purchase seems to fit the bill. Indeed, under terms of the deal, which has already been approved by the boards of both companies, Berkshire would pay $135 in cash for each share of Lubrizol. The price represents a 28% premium to LZ's closing price prior to the announcement, which ought to please shareholders of the chemicals corporation. All told, including debt, the total purchase would be approximately $9 billion. The transaction is scheduled to be completed during the third quarter of 2011.
We like this deal for Berkshire Hathaway. Once the transaction is completed, Lubrizol would become a wholly owned subsidiary of Warren Buffett's corporation, which already controls more than 80 businesses. Lubrizol is the market leader for several applications, and generates healthy earnings and cash flow. In fact, the company's share earnings have advanced every year since 2003, and net profit exceeded $680 million in 2010.
Although the holding company would benefit from the addition of Lubrizol, the impact would be marginal. That said, due to Berkshire's size and vast profitability, there are few purchases that would be considered ``game changers.'' For instance, last year, it completed the $26 billion acquisition of Burlington Northern Santa Fe. Although the railroad added significantly to the company's noninsurance operations, it currently accounts for a relatively small percentage of Berkshire's total revenues and profits. As mentioned earlier, Lubrizol achieved net profit of $680 million in 2010, while Warren Buffett's holding company posted earnings of almost $13 billion.
Since the transaction still awaits regulatory approval, it is not yet included in our financial presentation for Berkshire. Thus, at this time, we continue to believe that the insurance behemoth will post healthy 2011 and 2012 share-earnings results. In our view, the equity will also perform well out to the 2014-2016 time frame. The addition of Lubrizol, as well as the likelihood that Mr. Buffett will complete a few more decent-sized purchases over the next few years, should add to the stock's appeal over the long term.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.