Is Buffett being Krafty?

Warren Buffett may have thrown a monkey wrench into Kraft’s bid for Cadbury — not with his ‘no’ vote on Kraft’s plan to issue 370 million shares to help buy the British chocolate company, but with his scathing comments on Kraft’s board for a deal he has long regarded with skepticism. Buffett previously said Kraft’s stock was an “expensive currency” for funding the deal, a position he repeated on Tuesday.

Kraft’s proposed share issue would give it a “blank check,” allowing it to change its offer for Cadbury, Buffett’s insurance and investment company Berkshire Hathaway said in a statement. “And we worry very much that, indeed, there will be an additional change from the revision announced this morning.”

The statement came hard on the heels of a slight sweetening by Kraft of its $16.4 billion offer for Cadbury. The overall figure is the same, but the cash portion is a bit bigger. Perhaps more telling, it also followed a statement from Nestle shooting down speculation that the world’s biggest food group had any interest in getting involved in the Cadbury deal.

With Cadbury’s hopes for a new bidder now effectively dashed, and Kraft having tweaked its offer, any defections from the Kraft side will further crimp expectations that the bid might be raised again. Isn’t this precisely the message Kraft wants Cadbury to get?

While we’re on the subject of Kraftiness, we note the sale of Kraft’s frozen pizza business for $3.7 billion to Nestle — which is mean to help fund the increased cash portion of the Kraft bid — could well have helped Nestle decide to steer investors away from thinking it would challenge Kraft’s Cadbury bid.

Buffett seen raising bet on housing

BuffettWarren Buffett is in talks to buy GMAC’s mortgage lender Residential Capital, the New York Post reports. Teamed up with Appaloosa Management and Avenue Capital, Buffett has large debt positions in the gut-shot company, according to the Post. In September, Buffett’s Berkshire Hathaway and Leucadia National agreed to buy Capmark Financial Group’s mortgage loan and servicing business for up to $490 million.

If the residential property market hasn’t begun a solid recovery, it certainly established a solid bottom over the past six months. New home sales figures out yesterday were shockingly weak, but keep in mind that November and December are not particularly hot months for residential real estate, and new home sales are a much smaller chunk of the market than the existing portion. Lots of analysts were expecting the housing recovery to face a test as we get closer to the extended deadline in March for the $8,000 homebuyer tax credit.

But it’s a rare investor who gets rich betting against Warren Buffett. And if he’s looking to buy low, he could hardly have done better than ResCap. The lender has been flirting with dangerously low capital levels, with the Post reporting it is bouncing around the minimum required net worth of $250 million. It had a tangible net worth of $409 million at the end of the third quarter. The mortgage company has lost over $10 billion in the last three years. The number of loans delinquent rose to 13.40 percent at the end of June from 11.50 percent at the end of 2008.

Warren Buffett, American Railroad Baron

Following in the greatest of capitalist traditions, the Oracle of Omaha announced plans to buy up the shares he doesn’t already own in one of the country’s biggest railroads, Burlington Northern Santa Fe. And in an egalitarian, if unexpected, move, he said he would split his Class B stock to the tune of 50-to-1, making it possible for just about anyone to own Berkshire Hathaway’s traditionally lofty shares.

The railroad purchase is a bet on the future of America, Buffett said, and it’s his biggest acquisition ever. It values the railroad at $34 billion, and the price of $100 a share is a premium of nearly 32 percent. The premium vaults the railroad into the top spot by market cap, surpassing Union Pacific.

Buffett also owns stakes in other railroads, so it will be interesting to see if his move stirs any antitrust comments from Washington. Idiomatically, there is something profoundly rural in the Americana of Buffett’s latest bet; much more so than Berkshire Hathaway’s mainstay insurance business.

Warren Wonka the Candyman?

Warren Buffett knows sweets. His Berkshire Hathaway is the largest shareholder in Kraft Foods, which made an unsolicited — and rebuffed — $16 billion bid for Cadbury. The Wall Street Journal reported that the trust that holds voting control of Hershey has hired Buffett’s favorite banker, Byron Trott, as it also weighs whether to pursue the British chocolate maker.

Trott, a former Goldman Sachs banker who runs his own firm now, is known for his expertise in candy as well as in advising family- and trust-owned companies. He convinced Buffett to pay $6.5 billion to help finance Mars in its $23 billion takeover of Wrigley last year.

Paritosh Bansal and Jessica Hall report that while Trott’s latest engagement may not have anything to do with Buffett, he may end up helping the billionaire investor. Sources previously told Reuters Hershey is unlikely to make a bid on its own for all of Cadbury. But Hershey may want to pick up pieces of Cadbury, which makes Dairy Milk chocolate, Halls cough drops and Trident gum. This could bode well for Buffett, some investors said.

Did the Oracle just blink?

It may have only been about two percent of his holdings in the rating agency, but Warren Buffett’s decision to pare back his stake of Moody’s smacks of capitulation after a Manhattan judge ruled that just because they write opinions does not necessarily afford the much-maligned credit grading industry first-amendment protection.

Buffett‘s Berkshire Hathaway said in a filing it had sold 794,388 Moody’s shares on Sept. 1 and Sept. 2, chiseling its holding down to 39,219,312 shares. This isn’t the first time the Oracle of Omaha has seen fit to shave his share of the rating agency. Many will say these incremental measures are not a signal of a loss of faith in the business. But one could argue that the small sales serve less of a financial purpose than they signal slipping confidence. Even Buffett has said Moody’s damaged its brand by providing inaccurate ratings of SIVs, CDOs, CDSs and ETCs — the acronyms of mass financial destruction in the markets’ meltdown.

U.S. District Judge Shira Scheindlin in Manhattan said ratings on notes sold privately to a “select” group of investors were not “matters of public concern” deserving of traditionally broad protection under the First Amendment of the U.S. Constitution. Shares of both Moody’s and McGraw-Hill, which owns Standard and Poor’s, slid in response.

Omaha bowling alley seeks a bargain; no one likely fooled

Chops BowlingOmaha, Nebraska is always a beehive of activity when devotees flock here for the annual meeting of billionaire Warren Buffett’s Berkshire Hathaway.

Shops and restaurants were doing a brisk trade on Friday. Waiters at La Buvette Grocery and Wine Bar, a bistro in the gentrified old market area, said this week-end is always one of the busiest of the year. The rest of Omaha’s old market was also jamming.

At least one vendor — this one on the outskirts of the city — was looking for more than a good day’s business.

Going Nuclear

It is said that all that glitters is not gold. Keep that in mind when considering the bidding war heating up the nuclear power business. France’s EDF has offered $6.5 billion for half of Constellation Energy Group‘s nuclear business and some other assets, trumping Warren Buffett’s bid of $4.7 billion for all of Constellation.
If plummeting demand for everything from new cars to tin foil could fell BHP‘s monster bid for Rio Tinto, why wouldn’t it weigh on demand for energy? While nuclear power has regained some favor as a cheap, relatively clean alternative to nasty fossil fuels, is it really safe to expect consumers to ramp up electric heat this winter, and air conditioning next summer, when they are worried about losing their jobs?
And today brings more evidence that the lengthy, torturous bid process BHP endured before walking away from Rio Tinto may have saved it from dealing with a disastrous downturn in demand. Freeport McMoran, which bought Phelps Dodge for $26 billion two years ago, slashed its dividend this morning after raising it only four months ago.  
Constellation shares rose nearly 20 percent to over $30 this morning, but that is still well below the value of the EDF bid — $52 a share. Perhaps investors aren’t quite so warm and fuzzy toward nukes after all.

* Australia said it is open to a $5.9 billion merger between Qantas Airways and British Airways as long as it’s not a takeover, sending the Australian carrier’s shares up nearly 10 percent.

* A Japanese unit of Prudential Financial plans to bid for two Japanese life insurers put up for sale by American International Group, people familiar with the matter said.

Skinny Dipping

buffett3.jpgWhen pressed on why he buys into certain businesses, Warren Buffett likes to say he buys only businesses he understands. 
Certainly the $5 billion his Berkshire Hathaway Inc plans to plow into Goldman Sachs preferred stock immediately doesn’t represent an outright ownership stake. So perhaps the second-richest American won’t need to understand as much of what the so-called rocket scientists at Goldman do – which is a whole lot less, now that the bank is going commercial bank and its strategies built over decades are in tatters.
Another of Buffett’s truisms is that when the markets turn sour the problems are exposed, “you always find out who’s been swimming naked when the tide goes out,” he told CNBC television in August. “We found out that Wall Street has been kind of a nudist beach.”

He gave himself time to ogle before deciding where to plant his towel. Perhaps even more sexy than Goldman’s business is the stunning premium he’s picking up.
For its $5 billion, Berkshire gets preferred stock that carries a 10 percent dividend. It also gets warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 percent stake in Goldman. That’s a paper profit on the warrants alone of $437 million, based on Goldman’s closing stock price on Tuesday.

Other deals of the day:

* Sumitomo Mitsui Financial Group, Japan’s No. 3 bank, plans to invest in Goldman Sachs Group, Japanese media said, in what would be the third big Japanese investment this week on Wall Street.

Dow pays Up

dow.jpgCompanies may look cheap in the newly minted bear market, but Dow Chemical isn’t taking any chances with Rohm and Haas. The $18.8 billion deal at $78 per share is a 74 percent premium to the paint specialist’s closing price of $44.83 on Wednesday. If the deal wasn’t rich enough, buy-in from Omaha oracle Warren Buffett and sovereign wealth fund the Kuwait Investment Authority, in the form of convertible preferred securities for $3 billion and $1 billion, respectively, should drown out any naysayers, though it’s tough to imagine who could challenge the deal. CEO Andrew Liveris is keen to move Dow away from basic chemicals and towards higher margin specialty chemicals. Dow said the deal would be “meaningfully accretive” to earnings in the second year after it closes, with pre-tax synergies expected to be at least $800 million per year.

Novartis plans to buy its research partner, Swiss biotech company Speedel, for about $880 million to speed up development of potential blockbuster blood-pressure drug Tekturna. Speedel shares surged more than 90 percent to the offer price after the latest in a string of big pharma acquisitions of promising start-up drug development companies. Cash-rich major drugmakers have been queuing up to invest in medicines to fill their thinning pipelines — and the biotech sector has been hit by the global downturn in equity markets, fuelling takeover speculation. Shares in Novartis, which is keen to shore up its franchise in treating high blood pressure as its top-selling Diovan faces generic competition when it loses exclusivity in 2012, fell slightly as markets viewed the buy as expensive.

Other deals of the day:

* Canada’s Precision Drilling Trust said it will immediately reapproach U.S. oil driller Grey Wolf with its $10-a-share takeover offer if Grey Wolf’s shareholders vote down a proposed merger with Basic Energy Services.