General Electric (GE) the world’s second-largest company plans to offer at least $12 billion through a common stock offering to the public – scheduled to be priced ahead of Thursday’s market open. In addition, GE announced that it has reached agreement to sell $3 billion of perpetual preferred stock in a private offering to Warren Buffett’s Berkshire Hathaway (BRK-A).
Buffett’s investment will come with a 10% dividend and be callable after three years at a 10% premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Berkshire Hathaway Chairman and CEO Warren Buffett, whose firm recently invested $5 billion in the Wall Street top bank Goldman Sachs (GS) said:
“GE is the symbol of American business to the world. I have been a friend and admirer of GE and its leaders for decades. They have strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come.”
This latest move from GE comes as the conglomerate continues to see its stock shares, which have fallen one-third this year, get pummeled by investors’ worries amid the credit crisis.
Jeff Immelt, CEO of General Electric said the transaction does two things for GE investors:
“it enhances the firm’s flexibility and gives GE the opportunity to play offense in this market should conditions allow”.
Mr. Immelt also reaffirmed the fact that the co. remains committed to its Triple A rating and has taken steps to further strengthen its capital and liquidity position in the recent market volatility. GE, added Immelt, “continues to successfully meet its commercial paper needs”.
Credit default swaps for General Electric Capital Corp. (GEA), the financing arm, tightened significantly on the news. According to one of the most highly regarded interdealer brokers in the credit derivatives market Phoenix Partners Group, it now costs $500,000 to protect $10 million of bonds for five years, down from $650,000 before the news hit the wires.
On Sept. 25, GE revised its guidance for the 3Q and full year, reflecting the unprecedented weakness and unpredictability in the financial services markets.