Buffett to Pay $9 Billion for Lubrizol in Latest Industrial Foray

MARCH 15, 2011   THE WALL STREET JOURNAL

By SERENA NG And ERIK HOLM

Warren Buffett's Berkshire Hathaway Inc. said Monday it will buy chemical maker Lubrizol Corp. for $9 billion, in its latest expansion into the industrial sector, where the billionaire investor has been seeking new avenues for growth.

Cash-rich Berkshire said Monday it will pay $135 a share and assume about $700 million of debt in its deal to acquire Lubrizol, which makes lubricant additives for engine oils as well as chemicals used to make soap, hair-styling products, skin creams, paint and other industrial and consumer products.

Warren Buffett's Berkshire Hathaway Monday agreed to buy U.S. chemical maker Lubrizol Corp. for about $9 billion in cash. Erik Holm and Shira Ovide have details.

The purchase price represents a 28% premium to Lubrizol's closing price Friday on the New York Stock Exchange and is 18% above the stock's all-time closing high in October.

In 4 p.m. composite trading Monday, the company's shares were up 28% at $134.68. Berkshire Class A shares fell 1.3% to $126,400.

The deal was unveiled about two weeks after Mr. Buffett, Berkshire's chairman and chief executive, wrote in his annual letter to shareholders that he was "itchy" for a major acquisition. Analysts expect Berkshire, with $38 billion in cash and cash equivalents at the end of 2010 and billions more expected to pile up this year, to make several more acquisitions as Mr. Buffett tries to expand the already massive conglomerate at a rate faster than the broader stock market.

"Buffett's got lots of cash, and it continues to come in. He's on an acquisition charge, and he has to keep swinging," said Tom Story, a Berkshire investor and principal of Thomas Story & Son LLC, an investment firm in Oak Brook, Ill.

Initial contact between the two companies began around the turn of the year, well before Mr. Buffett made the proclamation in his shareholder letter, according to people familiar with the matter.

Lubrizol, which has acquired other chemical makers over the years, wasn't looking to sell itself, these people said. Berkshire first identified the company as a potential acquisition, and Lubrizol's management came to see being part of Berkshire as a good fit, the people added.

In a statement Monday, Lubrizol called the deal with Berkshire a "transformative event," and said it would allow the company "to focus on long-term plans without the constraints of short-term public market requirements."

In many respects, Lubrizol fits into the classic mold of cash-generating businesses Mr. Buffett favors. The company, which was founded in 1928, earned $732 million last year, up 46% from 2009 as revenue grew. It has been able to pass on higher raw materials prices to its customers, maintaining or improving its profit margins.

Lubrizol said it has profit margins of roughly 24%, leading market positions, consistent earnings, and a straightforward business model with strong management in place–matching criteria Mr. Buffett has laid out for Berkshire acquisitions.

The company employs about 6,900 people and has manufacturing plants in 17 countries. It has just three major competitors, analysts said. Mr. Buffett has previously said he likes companies with market-leading positions in sectors with a high barrier to entry.

Berkshire's acquisition price for Lubrizol values the company at roughly 13 times its 2010 earnings.

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Warren Buffett

The deal is one of the largest in Berkshire's history, though dwarfed by the more than $26 billion the conglomerate paid last year for railroad operator Burlington Northern Santa Fe.

Insurance operations have long been a major source of profit for Berkshire, but the Lubrizol acquisition would move it further into the industrial camp. Of Berkshire's $13 billion in profit last year, 45% came from its industrial businesses, which also include regulated utilities and retailers of consumer goods, versus 24% a decade earlier, its financial reports show.

Lubrizol at a Glance

• Key facts about chemical firm.
• Headquarters: Wickliffe, Ohio
• Global Work Force: 6,900
• 2010 Revenue: $5.4 billion
• Operations: 17 countries
• Businesses: Industrial additives, engine additives, engineered polymers, performance coatings, chemicals used in drugs, household and personal-care products
• Rivals: Infineum, Chevron Oronite and Afton Chemical

Mr. Buffett, in a statement Monday, called Lubrizol "exactly the sort of company with which we love to partner—the global leader in several market applications run by a talented CEO, James Hambrick."

Mr. Hambrick, 56 years old, is a chemical engineer by training and joined Lubrizol in the 1970s when he was still a student, starting in its operations department and later working in strategic planning and international business development, among many other management roles. He became CEO in 2004 and chairman in 2005.

Citigroup and Evercore Partners were financial advisers to Lubrizol, and Lubrizol's legal counsel is Jones Day. Berkshire's transaction counsel is Munger, Tolles & Olson LLP.

Evercore has advised other companies Berkshire acquired or invested in, such as Burlington Northern and Swiss Reinsurance Co.

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As it has added industrial companies, Berkshire in recent years has become something of a proxy for the U.S. and global economies, and its profits are driven in part by global consumption.

Other Berkshire acquisitions have included the $4 billion purchase of Iscar Ltd., an Israeli metalworking company, in 2006; the $4.8 billion purchase of the majority of Marmon Holdings, the Pritzker family's collection of manufacturing and service companies, in 2008; and smaller deals to buy Japanese toolmaker Tungaloy Corp., electronic-parts distributor TTI Inc. and power company PacifiCorp. Results at each are at least somewhat driven by economic conditions, and the same is true at Burlington Northern and Lubrizol.

Mr. Buffett has said he needs both large acquisitions and strong earnings from Berkshire's businesses to expand his company at a faster rate than the stock market, but the job is getting tougher as his conglomerate gets bigger.

The deal for Lubrizol is expected to close in the third quarter of this year and needs approval from its shareholders. After the closing, Lubrizol will operate as a subsidiary of Berkshire Hathaway. It will continue to be led by its current management team and remain based in Wickliffe, Ohio.

Insurance still plays an important role in generating cash for Mr. Buffett to invest in stocks and long-term assets. Berkshire maintains large holdings of stocks and investments in banks and financial companies including Wells Fargo & Co. and Goldman Sachs Group Inc., and last year amassed a large stake in German reinsurer Munich Re.

Before Monday's deal, Laurence Alexander, an analyst at Jefferies & Co. in New York, had calculated that Lubrizol would be worth about $143 per share to a private-equity buyer. Mr. Alexander said he doubted a rival bid would emerge, but said that may depend partly on the size of the breakup fee, not yet disclosed. Jefferies forecasts earnings per share of $11.30 for Lubrizol this year, up from $9.91 in 2010, excluding tax benefits.

Dmitry Silversteyn, an analyst at Longbow Research, said he had considered Lubrizol a potential takeover target because "the market was just not rewarding the company" despite strong profit margins and technologies. He said Lubrizol could attract a higher bid from a rival company able to wring out savings by combining similar operations.

—James R. Hagerty and Gina Chon contributed to this article.