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Buffett's $75M Payday Silences Critics MoneyNews
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All in all, it's just another brick in the wall – wallboards, that is. Billionaire investor Warren Buffett's latest coup comes in the form of a big investment in the world's largest wallboard maker, USG Corp. The Oracle of Omaha's firm, Berkshire Hathaway, earned $75.6 million on its investment in USG after the company said it would resolve asbestos litigation pending against it. Immediately after yesterday's announcement, USG shares climbed $11.63, to $91.48, in heavy trading. Berkshire Hathaway controls 6.5 million, or 15%, of USG stock.
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The company proposed a unique method of dealing with ongoing asbestos lawsuits – and it apparently passed muster with both company investors and Wall Street. "More than 70 companies have blamed asbestos litigation for their bankruptcies since 1982, with USG's coming in June 2001," Bloomberg reported Monday. "To raise cash for the asbestos settlements, USG offered shareholders the right today to purchase one new share for each share they own at $40 apiece." An asbestos trust would be funded with $900 million in cash and a contingent note for another $3.05 billion, the company said in a statement. USG obviously feels the move is a genuine way out of its legal problems. "USG and all its subsidiaries will emerge from Chapter 11 free of all asbestos personal injury claims," chairman and CEO William C. Foote said in a statement. And Buffett is equally bullish on the USG strategy. Berkshire announced it would earmark up to $1.8 billion on any new stock that isn't purchased by USG's current shareholders. Berkshire also will receive a $100 million fee for underwriting the deal, subject to approval of the bankruptcy court, USG said. So Buffett seems to be having the last laugh. "Berkshire acquired its stake in USG in the fourth quarter of 2000," says Bloomberg. "Some investors said Buffett made a mistake after USG's Chapter 11 filing in June of 2001 prompted the stock to plunge as low as $4." Apparently those investors were wrong. Editor's Note:
2. Oil Industry Profits Under Fire According to a growing chorus of media outlets, the answer seems to be yes. Deepa Babington and Ben Berkowitz, writing in Reuters today, report that in 2005, Exxon's "fourth-quarter net income rose 27%, to $10.71 billion, or $1.71 a share, from $8.42 billion, or $1.30 a share, a year earlier." After earning $36 billion in 2005, the company achieved the most profitable year in U.S. corporate history. But the article notes that "it's hard to celebrate a profit … when almost no one wants you to enjoy it." Looking to find such sentiment, Babington and Berkowitz cite troubled Democratic Wisconsin governor Jim Doyle, who is embroiled in a pay-for-play travel contract scandal. "Once again, ExxonMobil has reaped the largest windfall in U.S. history at the expense of hard-working families," Doyle said in a statement. "I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund." Naturally, Exxon isn't biting. Company officials released a statement on Monday saying that the company would use the bulk of its profits to spur energy research. "Its unfortunate that we are dealing with this criticism of our industry," said Exxon spokesman Mark Boudreaux. "We are doing our part to invest in new oil and gas projects to provide supplies to our customers." Meanwhile, there's little doubt that the oil industry is knee-deep in cash. According to Reuters, together, Exxon, Chevron and ConocoPhillips reported profits of $18.5 billion for the quarter and $63.9 billion for all of 2005. "Taken in context, that combined annual profit eclipses the market capitalization of one-third of the blue-chip companies in the benchmark Dow Jones industrial average," says Reuters. "It also is a larger figure than the entire economies of 131 out of the 184 countries ranked by the World Bank in 2004."
While the House Energy Committee is weighing hearings on the Big Oil profits, a new study by the Washington-based Tax Foundation says that "Many who propose taxing energy companies more heavily than other firms, with a 'windfall' tax, believe that these firms somehow escape normal taxpaying requirements, leaving other industries to carry a heavier load," said Scott Hodge, president of the Tax Foundation and co-author of the new study. "But fourth-quarter financial statements show this isn't true."
But political lectures on Big Oil profits fail to take into account how large a tax contribution those profit-laden companies make to the U.S. treasury. Editor's Note:
3. Junk Bond Investors Snatch up Ford, GM Struggling automotive giants General Motors and Ford are again the focus of big financial news. But it's fairly certain that neither company would ever have imagined anything like this in their heyday: Bloomberg reports that junk bond investors are eagerly adding both firms to their high-yield portfolios.
The news comes seven months after both automakers saw their credit ratings reduced to junk status. On May 5, 2005, Standard & Poor's cut each company's rating, with Moody's and Fitch following suit. Ford is currently rated BB+ by Fitch, Ba3 by Moody's and BB- by S&P. GM is rated B1 by Moody's, B by S&P and B+ at Fitch. "The percentage is up from 90% a month earlier. All 38 funds owned bonds from GM's finance arm, while 10 own the parent company's bonds." "Interestingly, 26 of the 38 funds that owned GM exposure had made it one of their five largest holdings," Acciavatti added. "Fourteen of these funds had made GM their largest holding." According to Bloomberg, the increased activity in the high-yield sector is raising some eyebrows both in Detroit and on Wall Street. The wire service reports that five of the funds surveyed had more than 3.5% of their assets in GM debt and four more had 3 to 3.5%. "GM had the largest market weight in the J.P. Morgan Global High-Yield Index in December, accounting for 1.92% of the debt assets represented in the index," says Bloomberg.
Some 29 of the 41 funds surveyed by Morgan Stanley own Ford bonds, or 71%, up from 68% in November, according to the Morgan Stanley report. Bloomberg says that "high-yield, high-risk bond returns in 2006 are likely to again lag behind their average for the past decade. Returns, including reinvested interest, may total 3 to 4% this year, half the average the past 10 years, Acciavatti said in the earlier report." According to Merrill Lynch statistics, high-yield bonds returned 2.7% to investors in 2005 – the lowest numbers in three years. Editor's Note:
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