Berkshire Hathaway to Buy Lubrizol for About $9 Billion

Berkshire Hathaway Inc. CEO Warren Buffett
Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett. Photographer: Andrew Harrer/Bloomberg

Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Lubrizol Corp., the world’s largest producer of lubricant additives, for about $9 billion in the cash-flush investor’s second-biggest acquisition in the past five years.

Berkshire will pay $135 a share in cash, 28 percent more than Lubrizol’s closing price on March 11, Omaha, Nebraska-based Berkshire said in a statement today. The purchase includes an additional $700 million of net debt.

Buffett is using his almost $40 billion pile of cash to pursue bigger acquisitions after Berkshire generated about $1 billion in free cash flow a month last year and as interest rates near zero percent limited returns in fixed-income markets. The 80-year-old told investors last month that his “elephant gun has been reloaded, and my trigger finger is itchy.” The purchase is Buffett’s second-largest since 2006 after his agreement in 2009 to buy Burlington Northern Santa Fe railroad, according to data compiled by Bloomberg.

“Lubrizol is exactly the sort of company with which we love to partner -- the global leader in several market applications run by a talented chief executive officer, James Hambrick,” Buffett said in the statement.

The purchase will generate profits for Berkshire for decades, though returns will be limited because Lubrizol shares have already more than quadrupled from their 2009 lows, said hedge-fund manager Jeff Matthews.

‘Around Forever’

“It’s going to be around forever because you need this stuff to run the world,” said Matthews, who wrote “Pilgrimage to Warren Buffett’s Omaha” and invests in Berkshire. “He’s not stealing it.”

In his annual report to shareholders last month, Buffett said he prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earnings power, and “good” returns on equity while employing little or no debt.

Lubrizol was one of about 40 companies with market capitalization between $4 billion and $40 billion that had capital expenses accounting for at least 5 percent of their net fixed assets; a return on equity exceeding 10 percent; profit growth in the past five years that ranked in the top 50 percent; and an average price-earnings ratio in that span that was less than the median in the Standard & Poor’s 500 Index, data compiled by Bloomberg show.

Textile Manufacturer

Buffett built Berkshire over four decades of acquisitions and stock picks, bringing the value of his personal stake in the company to about $50 billion, almost all of which he has pledged to charity. Berkshire was a failing textile manufacturer trading at about $15 when Buffett took control in 1965. Its net income last year climbed 61 percent to $13 billion, the highest since 2007. The shares closed at $128,000 on March 11.

Berkshire, which has a market value of $210 billion and employed more than 260,000 people as of Dec. 31, owns 10 insurers including Geico and more than 60 other companies ranging from food distributor McLane Co. and clothing-maker Fruit of the Loom to toolmaker Iscar Metalworking Cos. and utility MidAmerican Energy Holdings Co.

Including debt, the Burlington Northern deal was valued at $35.8 billion. Buffett’s second-largest purchase was reinsurer General Re in 1998, for $17.7 billion.

Berkshire and Lubrizol said they expect the purchase to be completed in the third quarter. Lubrizol will operate as a subsidiary of Berkshire and remain based in Wickliffe, Ohio. Lubrizol had revenue of $1.32 billion in the fourth quarter and adjusted earnings per share in the period of $2.45, the company said last month.

Citigroup Inc. and Evercore Partners were financial advisers to Lubrizol, while Jones Day was legal counsel. Munger, Tolles & Olson LLP was legal counsel for Berkshire Hathaway.