On July 26, we learned that Warren Buffett’s Dow Chemical Company investment, which generates Berkshire Hathaway around $255 million a year, is potentially going to be redeemed now that the company is receiving proceeds from the legal dispute that they have currently undergone with Kuwait.
The CEO of Dow Chemical, Andrew Liveris, said that they are seriously considering using the Kuwait award to help improve the finances of the company. This was mentioned on a conference call that they had today. When he was asked about the preferred shares of Dow Chemical, which include $1 billion worth of shares which were sold to Kuwait’s sovereign wealth fund, as well as $3 billion worth of shares that are currently being held by Berkshire Hathaway, the CEO stated, “that’s the balance sheet, and I would say it’s included.”
Dow Chemical actually sold these preferred shares during the year 2009 at an 8.5% annual dividend, because they needed to raise funds to help purchase the company Rohm & Hass Co. at the time. This current yield is actually around 4 percentage points higher than the 30 year notes that Dow currently has which are due in 2041. This is all according to data that was compiled by Bloomberg.
“We have the expensive prefers on the balance sheet that will be expensive to retire prematurely,” was said by Liveris today. “Having said that, they’re very accretive, the immediate time” they’re retired, stated Andrew.
If Dow were to make this payment, then it would obviously add to the 81 year old Buffett’s fund that he has for investments and acquisitions. Berkshire Hathaway actually increased their stock holdings in 2011 as the Goldman Sachs Group Inc., General Electric Company and Swiss Re LTD paid them more than $12 billion to buy back some of the securities that Buffett purchased during the financial crisis.
The funds that Warren Buffett and Berkshire Hathaway would receive from Dow would provide them with “a little more ammunition in trying to acquire a whole company” said David Kass. Or it could potentially give them the opportunity to make larger or newer equity bets. Mr. Kass is a professor at the University of Maryland’s Robert H. Smith School of Business. He made his comment in an interview that took place prior to the conference call today.
There was an arbitration panel ordered in May which requires Kuwait to pay Dow Chemical a grand total of $2.16 billion, because they canceled a deal which was going to give them part of Dow’s plastics business based out of Midland, Michigan in the year 2008. As of right now, Kuwait has requested that a reconsideration of the award take place, but they are not in denial of the fact that they were in breach of contract. This was also spoken by Andrew Liveris today.
“They are just asking for an examination of due process,” said Liveris. “It happens all the time with an award of this size.”
The final award on this issue is actually expected to be made at some point this year, and the payment for this award is expected to arrive in the hands of Dow Chemical at some point in 2013. There are also going to be fees and interest included in the award. It is known that Dow Chemical Company will use these funds to reward their shareholders, as well as improve their current balance sheet and possibly even fund the economic growth of the company, according to Liveris. They may even look into other acquisitions as a way to use some of these proceeds.
Dow Chemical went to Warren Buffett and asked him to help finance their acquisition of Rohm & Hass which cost them more than $16 billion. If they want to, Berkshire Hathaway is capable of exchanging their stake of preferred stock for 72.6 million shares of the common stock of Dow Chemical. The conversion price for this move would be $41.32. Dow’s stock closed yesterday at $30.27.
The Commitment Made by Warren Buffett
“We do well if the common at Dow does well,” mentions Buffett to Bloomberg TVs Betty Liu during an interview that took place earlier this month. “We also do well on the coupon on Dow, but we made a commitment” during a time when there were a lot fewer sources of financing for Dow Chemical, said Buffett.
Warren Buffett made no mention of the price that he’d be willing to actually retire the securities when speaking to Liu. There was also a message left for Buffett with his assistant today, but he did not immediately respond. And there was an attempt made to connect with the Kuwait Investment Authority, but it was unsuccessful outside of regular business hours.