Warren Buffett’s investment in Dow Chemical Co. (DOW), which generated $255 million a year for his Berkshire Hathaway Inc. (BRK/A), may be redeemed with proceeds the chemical maker will get as part of a legal dispute with Kuwait.
Dow Chief Executive Officer Andrew Liveris said on a conference call today that the award may be used to improve the company’s finances. Asked about preferred shares, which include $3 billion held by Berkshire and $1 billion that were sold to Kuwait’s sovereign wealth fund, the CEO said, “that’s the balance sheet, and I would say it’s included.”
Dow sold the securities to help fund the 2009 purchase of Rohm & Hass Co. The preferred shares pay an 8.5 percent annual dividend. The yield is about 4 percentage points higher than on Dow’s 30-year notes due in 2041, according to data compiled by Bloomberg.
“We have the expensive preferreds on the balance sheet that will be expensive to retire prematurely,” Liveris said today. “Having said that, they’re very accretive, the immediate time” they’re retired, he said.
A payment by Dow would add to funds Buffett, 81, has for acquisitions and investments. Berkshire increased stockholdings last year as Goldman Sachs Group Inc. (GS), General Electric Co. (GE) and Swiss Re Ltd. paid more than $12 billion to buy back securities he added in the depths of the financial crisis.
Dow’s funds would give Buffett “a little more ammunition in trying to acquire a whole company” or make new or larger equity bets, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, in an interview before today’s conference call.
An arbitration panel ordered in May that Kuwait pay the chemical maker $2.16 billion for canceling a deal to buy part of Midland, Michigan-based Dow’s plastics business in 2008. Kuwait has asked for a reconsideration of the award without contesting that the contract was breached, Liveris said today.
“They are just asking for an examination of due process,” Liveris said. “It happens all the time with an award of this size.”
The final award should be issued this year, he said, and payment may arrive in 2013 along with interest and fees. The funds will be used to reward shareholders, improve the balance sheet or fund organic growth, he said, ruling out acquisitions with the proceeds.
Dow turned to Buffett to help finance its acquisition of Rohm & Hass for more than $16 billion. Omaha, Nebraska-based Berkshire can exchange its preferred stake for about 72.6 million shares of the chemical maker’s common stock at a conversion price of $41.32 each. Dow closed yesterday at $30.27.
“We do well if the common at Dow does well,” Buffett told Bloomberg Television’s Betty Liu in an interview this month. “We also do well on the coupon on Dow, but we made a commitment” at a time when there were few sources of alternative financing, he said.
Buffett didn’t comment to Liu on the price at which he’d retire the securities. The billionaire didn’t immediately respond to a message today left with an assistant. An attempt to reach the Kuwait Investment Authority for comment wasn’t immediately successful outside of regular business hours.