CNBC: Warren Buffett"s GE Warrants Still Under Water One Year Later

Sunday, November 29, 2009

CNBC: Warren Buffett"s GE Warrants Still Under Water One Year Later

Published: Thursday, 1 Oct 2009 | 10:55 AM ET

By: Alex Crippen
Executive Producer

Warren Buffett"s warrants to buy almost 135,000 General Electric common shares are still worthless, as they have been for almost the entire time since Berkshire Hathaway"s $3 billion investment in the company was announced exactly one year ago today.

That"s in sharp contrast to the Goldman Sachs deal Berkshire made just a few days before the GE infusion. Today, Buffett"s Goldman warrants are worth about $3 billion.

The main element of both deals was Berkshire"s multi-billion dollar loans to both Goldman ($5 billion) and GE ($3 billion), made near the height of the credit crisis last fall when it seemed that no company was immune from potential collapse.

Both loans, which came in the form of preferred stock purchases, pay a guaranteed 10 percent a year. Berkshire gets that hefty interest rate on its money no matter what Goldman and GE"s common shares do in the market.

Fred LaSenna / CNBC.com Illustration

Buffett"s "celebrity-style" endorsements of General Electric and Goldman Sachs, making last year"s investments even more valuable to the recipients during the troubled times, reminded us of the old magazine ads in which a movie star or sports hero talks about his or her devotion to a certain automobile or brand of soap flakes. Buffett"s word of praise for GE are real. The ad itself is a product of our imagination.

But, in what Buffett has called a "bonus," Berkshire also got the right to buy a pre-set amount of common stock in each company at a pre-set price, within 5 years.

Berkshire has the right to buy 43,478,260 shares of Goldman at $115 each, for a total price of $5 billion. It can also buy 134,831,460 shares of GE at $22.25 each, for a total of $3 billion.

Goldman"s stock has soared above the $115/share strike price, which means Berkshire would be getting a bargain if it exercised its right to buy.

GE, on the other hand, is trading today around $16, about 27 percent below the $22.25 strike price for those warrants. Unless GE"s market price rises above that level, Berkshire has no reason to exercise its right to buy at the higher market price.

General Electric is CNBC"s parent company.

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