Buffett Faces End of $255 Million a Year on Dow Stake

Warren Buffett could soon have to bid adieu to another of his high-yielding investments from the financial crisis.

Dow Chemical Co. shares rallied past $53.72 today for the first time in nine years. If they close above that price for 20 trading days in a 30-day window, the chemical maker can convert Buffett’s $3 billion preferred stake into common stock.

Swapping the shares would cut the dividends that Dow has been paying since it turned to Buffett’s Berkshire Hathaway Inc. (BRK/A) to help finance a takeover in 2009 of Rohm & Haas Co. The billionaire investor went on a deal-making spree during the credit crisis, lending billions of dollars to companies including Goldman Sachs Group Inc. and General Electric Co. at historically high rates.

“He built the ark before the storm came up,” Luke Sims, chairman of Sims Capital Management, said of Buffett. Having cash during a crisis “and staying power gives you many, many opportunities.”

The preferred stake is particularly expensive for the chemical maker with interest rates now near record lows. The securities have an 8.5 percent yield, entitling Berkshire to $255 million in dividends annually. Kuwait’s sovereign wealth fund also helped finance the Rohm & Haas purchase and holds $1 billion of the securities.

‘Value-Creating’

“Our desire there obviously is for our share price to continue to appreciate and then convert those into common,” Chief Financial Officer Bill Weideman said today on Dow’s second-quarter earnings conference call. “That is the most value-creating option.”

Converting the preferred stock would be a milestone for Dow Chief Executive Officer Andrew Liveris, who has come under pressure this year from hedge-fund manager Dan Loeb to boost the company’s share price. While defending his strategy, the CEO has increased the common-stock dividend, announced buybacks and expanded a program to divest underperforming units.

The actions and higher earnings have helped send Dow shares up 21 percent this year, the third-best result in the 16-company Standard & Poor’s 500 Chemicals Index. The Midland, Michigan-based company climbed 3 percent to $53.89 at the close in New York after reporting earnings that beat analysts’ estimates on expanding margins.

Lower Costs

A boom in U.S. natural gas production since the recession has lowered ingredient costs for Dow and helped boost profit. Net income last year was $4.41 billion, up from $336 million in 2009.

The shares have gained on Loeb’s push and investor anticipation of earnings from new projects, John Roberts, a New York-based analyst at UBS Securities LLC, said by phone. Dow next year will be turning more gas into plastics and chemicals on the U.S. Gulf Coast and will be starting its approximately $20 billion Sadara joint venture with Saudi Arabian Oil Co.

“People have come to view the dilution from the preferreds as a manageable issue,” based on prospects for high earnings and share buybacks, Roberts said.

Berkshire and the Kuwait Investment Authority would be entitled to 96.8 million common shares, according to terms in the chemical maker’s most recent annual report. That’s about 8 percent of the weighted-average shares outstanding.

Dow has repurchased about 51 million shares for $2.4 billion as part of a $4.5 billion program aimed at reducing the impact of the preferred-share conversions, CFO Weideman said today.

Mars, Wrigley

The annual dividend for Berkshire on common shares would be about $107 million based on the current payout.

Buffett didn’t immediately respond to a request for comment sent to an assistant.

Some of Buffett’s other crisis-era investments have been wound down. In October, Mars Inc. said it repaid $4.4 billion in bonds that Berkshire bought to help the candy maker acquire Wm. Wrigley Jr. Co.

That same month, Buffett received common equity stakes in Goldman Sachs and GE to settle warrants he received under deals five years earlier. Berkshire committed a combined $8 billion to the companies in 2008 to help them shore up capital and restore market confidence after Lehman Brothers Holdings Inc. collapsed. Both Goldman Sachs and GE repaid the money at a premium in 2011.

The redemptions have caused Berkshire’s cash pile to swell at a time when fixed-income investments have historically low yields. Buffett has responded by pursuing acquisitions, like last year’s purchase of the largest electric utility in Nevada.

“His main goal is to buy more operating businesses,” said Sims, whose firm counts Omaha, Nebraska-based Berkshire among its largest holdings. “He’ll find plenty of places to put the money to work.”

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Simon Casey at scasey4@bloomberg.net Dan Reichl, Steven Frank

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