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Buffett Buys Lubrizol for $9.7B

Thursday, March 17, 2011

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The “Oracle of Omaha” is making a big splash into the global lubricants business, with one of his largest acquisitions ever: a $9.7 billion cash deal for specialty chemical maker Lubrizol Corp., the world’s largest lubricant additives supplier.

White House photo by Pete Souza Berkshire Hathaway CEO Warren Buffett meets with President Obama. Obama gave Buffett a new tie before the meeting, but Buffett kept on his old red frayed one.

Omaha-based Berkshire Hathaway Inc., helmed by CEO Warren Buffett, announced this week that it would pay $135 per share and assume $700 million in net debt to acquire Lubrizol, based in Wickliffe, OH.

The share price is 28% higher than Lubrizol's closing price on Friday (March 11) and tops Lubrizol's all-time-high share closing price by 18%.

The agreement was filed Tuesday (March 15) with the unanimous approval of both companies’ boards of directors.

‘Keep Doing for Us’

“Lubrizol is 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,” Buffett said in a statement. “Our only instruction to James—Just keep doing for us what you have done so successfully for your shareholders."

Lubrizol Corp. Lubrizol’s maintenance coatings applications include direct-to-metal enamels, concrete sealers and railcar/transportation coatings.

Founded in 1928, Lubrizol manufactures specialty chemicals for a broad range of applications, including resins and additives for performance coatings, lubricants, metalworking fluids, inks, engine oils and pharmaceuticals. The company has about 6,900 employees worldwide and reported 2010 revenues of $5.4 billion.

Assuming majority shareholder approval and the satisfaction of customary closing conditions, the transaction should be completed during the third quarter of 2011. After that, Lubrizol will operate as a subsidiary of Berkshire Hathaway. Lubrizol will remain at its current headquarters and will continue to be led by its current management team.

‘Compelling Value’

Hambrick said the sale “provides compelling value to our shareholders and is a clear endorsement of the growth and diversification success Lubrizol has achieved.”

Lubrizol is “very excited” to be joining “the Berkshire Hathaway family,” said Hambrick. “We believe its philosophy of supporting long-term global investments in technology, assets and employees will enhance execution of our growth strategies.”

Lubrizol told investors on its web site that the transaction would “deliver a substantial return to our shareholders with significant value and immediate liquidity.”

What Warren Wants

“Lubrizol also matches the other criteria that Warren Buffett has laid out for acquiring companies,” the company said. “It has demonstrated consistent earning power and has a straightforward business model with strong management in place.”

The company noted that it was notching 24% EBITDA margins and boasted “a strong international presence” that includes “a high-margin and high-cash-generating lubricant additives business” as well as a “very profitable, high-growth advanced materials business segment with access to large addressable markets.”

Lubrizol offers Buffett “fairly predictable cash flows and a high return on equity,” and talks between the companies began just a few weeks ago, the Christian Science Monitor reported. Buffett recently told his shareholders that he had “reloaded” his “elephant gun” and was hunting for acquisition targets to use some of Berkshire's cash, the newspaper reported.

Berkshire Hathaway and its dozens of subsidiaries engage in diverse business activities, including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services. Subsidiaries include Benjamin Moore & Co., Johns Manville, Dairy Queen, GEICO Insurance, Helzberg Diamonds, See’s Candies, the H.H. Brown Shoe Group and, recently, Burlington Northern Railroad.

Market Outlook

The global lubricant market includes industrial oils and fluids; metalworking fluids; industrial natural gas, aviation, marine, and railroad oils; industrial greases; and consumer and commercial engine oils, hydraulic and transmission fluids, gear oils and grease.

In 2009, market researcher The Freedonia Group estimated that the global lubricant market—then valued at $48.8 billion—would increase by 1.6% per year to 40.5 million metric tons by 2012. The company predicted relatively slow volume growth, but significantly increasing demand for high-performance lubricants over lower-value ones.