Berkshire Hathaway To Buy Lubrizol

Berkshire Hathaway, the Omaha-based holding company led by famed investor Warren Buffett, has agreed to purchase the specialty chemical maker Lubrizol in a transaction valued at 
$9.7 billion.

Berkshire will pay $135.00 in cash for each of Lu­briz­ol’s outstanding shares. The offer represents a 28% premium over Lubrizol’s price at its close on Friday, March 11, before the deal was announced, and is 18% more than Lubrizol’s all-time highest closing price. The transaction value also includes about $700 million in net Lubrizol debt. The companies expect to complete the deal in the third quarter of this year.

In 2010, Lubrizol earned about $750 million on $5.4 billion in sales. Some 72% of Lubrizol’s sales come from its additives business, which makes ingredients for engine and industrial equipment lubricants. The rest come from its advanced materials business, which produces thermoplastic elastomers, chlorinated polyvinyl chloride, ingredients for personal and home care products, and coatings additives.

Lubrizol rebounded strongly from the recession and has itself been in an acquisitive mood. Last year, it was in a bidding war with BASF to purchase Cognis. After BASF prevailed, Lubrizol settled for the much smaller purchase of Nalco’s performance products group.

Lubrizol CEO James Hambrick says the transaction is a “clear endorsement of the growth and diversification success” his company has achieved.

Berkshire, meanwhile, generated $136 billion in revenues last year operating such well-known firms as Government Employees Insurance Co. (Geico) and the Burlington Northern Santa Fe Railway. Its most extensive holding in the chemical industry to date is the $3 billion in preferred Dow Chemical shares it acquired to help Dow finance its purchase of Rohm and Haas. Berkshire also owns building products maker Johns Manville and paint maker Benjamin Moore.

In the annual letter to shareholders he penned in February, Buffett declared that he was looking for acquisitions in businesses unrelated to insurance. “We will need both good performance from our current businesses and more major acquisitions,” he wrote. “We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

Keeping with its modus operandi, Berkshire intends to retain Lubrizol’s management. It also intends to run Lubrizol as a subsidiary and keep its Wickliffe, Ohio, headquarters in place. “Our only instruction to James: Just keep doing for us what you have done so successfully for your shareholders,” Buffett says.

The consensus among analysts is that Berkshire got an attractive price for Lubrizol. David Begleiter, a stock analyst with Deutsche Bank, says a more reasonable price would have been $150.00 per share, but he doesn’t expect Lubrizol shareholders to get that much because of the lack of a realistic competitive bidder. “We do not expect private equity to challenge Berkshire Hathaway and its CEO,” he wrote to clients. “And there are, in our view, no logical strategic buyers for this, the world’s largest lubricant additives business.”