Thursday, August 25, 2011

Berkshire Hathaway buys BAC Preferred Stock and Warrants for $5bn.

Bank of America has been in trouble of late because of ongoing subprime losses.  The Bank needed a significant cash boost.  Warren Buffet has just provided that boost in the form of $5 billion of cash.   The deal is pretty straightforward (full details are here).
CHARLOTTE, N.C., Aug 25, 2011 (BUSINESS WIRE) --Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.

So basically BAC issued preferred stock that pays a $300 Million dividend and together with 700 million calls with a strike of $7.14.

You don't have to be a financial rocket scientist to realize that this is a good deal, but I'll leave it as an exercise for my students to try to figure out what this deal is really worth.