Buffett’s Lubrizol deal shows big game isn’t cheap

March 14, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It didn’t take long for Warren Buffett to bag more big game. Just a few weeks after telling shareholders about his itchy trigger finger, Berkshire Hathaway reached a deal to buy U.S. lubricants maker Lubrizol for $9.7 billion. But to acquire a public company that ticks the Oracle of Omaha’s boxes for attributes including scale, he’s paying a sizable premium.

Lubrizol will fit nicely with Buffett’s other corporate trophies. For one, the Ohio-based company is a market leader for many of the additives that go into engine oils and industrial lubricants. The business model is simple, deriving most of its revenue as a middleman between refiners and marketers to end users. And there’s hefty enough profit for Lubrizol to be caught in Buffett’s crosshairs.

Pachyderms don’t come cheaply, however. Buffett is offering a 28 percent premium to the unaffected share price. It’s true other takeover targets of late have commanded even richer prices, but this is a formidable sweetener for a company in an unfashionable industry. Buffett’s bid tops the all-time high of Lubrizol’s share price by 18 percent.

It may be the cost of his exacting criteria. Buffett likes to pounce on prey before other hunters can size it up. He won’t get involved with auctions of companies. That requires him to keep his investment discipline while also offering a knockout price. That’s not easy for a company with a market value of more than $200 billion.

Buffett may yet have struck the right balance. His offer values the Lubrizol enterprise at seven times this year’s estimated EBITDA. That doesn’t sound outrageous for a specialty chemicals company, particularly one with revenue growth that has been a brisk 16 percent compounded annually for the past seven years, including a dip in 2009.

Lubrizol could be a temporarily wounded animal. While demand for chemicals to operate engines is recovering, the cost of raw materials is rising. Oil prices don’t show much sign of settling any time soon. That may be why investors reacted squeamishly to Buffett’s latest catch.

On the day in November 2009 when Buffett agreed to pay $44 billion for railroad operator Burlington Northern, Berkshire shares gained while the broader market fell. Following news of the Lubrizol deal, Berkshire shares tumbled 1.7 percent, declining further than the S&P 500. No one said hauling off elephants would be easy.

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