Buffett Bags a Zebra: An Initial Look at Lubrizol CorporationPublished on March 14, 2011 at 6:42 pm
Berkshire Hathaway and The Lubrizol Corporation have announced a definitive agreement for Berkshire to acquire 100 percent of outstanding Lubrizol shares for $135 per share in an all-cash transaction. The transaction, announced before the start of trading on Monday, March 14, represents a 28 percent premium for shareholders of Lubrizol in a transaction worth $9.7 billion including the assumption of $0.7 billion in net debt. The transaction comes two weeks after Berkshire Hathaway Chairman and CEO Warren Buffett indicated that his “elephant gun has been reloaded, and my trigger finger is itchy.”
Looking for Elephants, Found a Zebra …
While the Lubrizol acquisition will represent one of the largest transactions in Berkshire’s history, it is a far smaller deal than last year’s acquisition of Burlington Northern Santa Fe and may be characterized as more of a “zebra” than an “elephant”. The acquisition was likely in the works prior to Friday’s massive earthquake and tsunami in Japan. While reports of insurance industry loss estimates have varied widely in recent days, apparently Berkshire’s exposure through its reinsurance subsidiaries was not significant enough to impact the Lubrizol acquisition.
Despite periodic catastrophes, even on a massive scale, Berkshire certainly has ample cash to fund the Lubrizol transaction based on a cash balance of over $38 billion at the end of 2010, of which nearly $35 billion was held outside the company’s regulated utility and railroad business. In addition, Berkshire will probably receive nearly $9 billion in additional cash later this year when Goldman Sachs and General Electric are expected to redeem the investments Berkshire made during the dark days of the financial crisis in October 2008. In his 2010 letter to shareholders, Mr. Buffett stated that Berkshire has pledged to hold at least $10 billion of cash at all times.
In this article, we will take an initial look at Lubrizol’s business based on recent SEC filings, company presentations, and other information located in the hours since the transaction was announced. Our initial impression is that Lubrizol appears to have many of the economic characteristics that Warren Buffett is known to look for, particularly related to pricing power in an inflationary environment. However, we note that Lubrizol has experienced significant margin expansion in recent years that must be sustained in order to result in the financial performance that Mr. Buffett is probably expecting.
Disclosure: Long Berkshire Hathaway.