After running Berkshire Hathaway for over 60 years, Warren Buffett will retire at age 95. But he’s not sailing into the sunset without making one last impressive investment. What makes his company’s most recent acquisition notable is its departure from their other recent sell-offs in various positions.
It was recently announced that the conglomerate would be purchasing OxyChem, a petrochemicals business, from Occidental Petroleum (also known as Oxy) for $9.7 billion. This transaction is noteworthy because it’s the most significant acquisition from Berkshire since 2022, and the move was made just ahead of Buffett departing as CEO.
GOBankingRates consulted financial and investing experts to gather insights into why this could be a genius move and what investors should take away from it.
Here are the three main reasons why this deal is a brilliant move from Buffett:
“At about eight times OxyChem’s projected 2025 EBITDA, Berkshire acquired OxyChem at what Buffett considered a low price within an otherwise weak chemical industry, with peers like Dow selling at lower valuations,” said Kira Byrd, the chief accountant and co-owner at Curl Centric.
The entire industry is seeing lower earnings due to the same challenges that reduced profits for OxyChem. If the industry turns around as expected, the experts at The Motley Fool said Berkshire would be getting in at a bargain price. “OxyChem is a stable cash generator producing essential products including chlorine, caustic soda (sodium hydroxide), and PVC materials for use in water treatment, pharmaceutical applications, housing construction, and other industries that produce steady profits regardless of market conditions,” Byrd explained.
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“The genius here is with the structure of the deal and the resulting improvement in the balance sheet for both companies,” said Ryan McCallister, an operator, president and founder of F5 Mortgage. “Occidental Petroleum receives $9.7 billion in cash and announces plans to use some $6.5 billion of the money to get its debt below a critical $15 billion threshold. This greatly improves the balance sheet of OXY to reduce its overall risk and most likely save it $350 million to $400 million a year in interest payments alone.”
The Motley Fool noted the cash injection from Berkshire will be about $8 billion after taxes, with $6.5 billion going towards paying down debt and the other $1.5 billion going to Occidental’s coffers. Byrd noted Occidental’s debt reduction is enhancing Berkshire’s existing 28.2% ownership and adding another layer of protection against future energy price volatility through Berkshire’s other holdings, such as Lubrizol.
