(Bloomberg) — It had all the trappings of a classic Warren Buffett deal. There were the preferred shares created just for him, the warrants giving him an option to buy more common stock and a hefty dividend — 8%, which came to a cool $800 million a year on the $10 billion he plunked down.
On their face, the terms were so favorable for Buffett’s Berkshire Hathaway Inc. — and so onerous for the company, the oil driller Occidental Petroleum Corp. — that fellow billionaire investor Carl Icahn seethed with indignation. It was, he wrote, “like taking candy from a baby.”
But now, some 11 months later, Buffett’s bet on Occidental is suddenly a far cry from the slam dunk that it once appeared. Few large companies, if any, in the U.S. shale patch have been hit harder than Occidental by the collapse in oil prices this week. And while Buffett’s preferred shares don’t trade, the plunge in price on the company’s common stock, down 70% in the last 12 days, and in its benchmark bonds, down 25%, provide clues about the market’s perception of the value of his investment.
The stock dropped 16% to $9.95 Thursday before trading was halted due to reaching a circuit breaker limit. It closed at $58.88 when Buffett invested last April.
For Buffett, the episode marks another setback for one of his key investments, just a year after the Kraft Heinz Co. writedown unleashed turmoil at that business. It also raises questions once again about how he intends to use his massive cash holdings — $128 billion at last blush — with few wholly appealing investment options to choose from.
The $10 billion investment in Occidental, his first major deal in four years, was instrumental in allowing the company to win a bidding war for Anadarko Petroleum Corp. But the transaction is only exacerbating Occidental’s troubles. Previously a…
Source: FuelFix
