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FINANCIAL SYSTEM IN CRISIS : FINANCE

Buffett girds GE with $3-billion investment

October 02, 2008|Walter Hamilton | Times Staff Writer

NEW YORK — Even General Electric Co., one of the world's largest and most respected companies, needs a helping hand during a financial crisis. The industrial giant got it Wednesday from investor extraordinaire Warren E. Buffett.

Berkshire Hathaway Inc., the holding company run by the billionaire, agreed to buy $3 billion in preferred stock as part of a plan by GE to raise $15 billion.

The cash infusion shows how even the sturdiest of companies are being challenged by the firestorm pelting the credit markets. GE is trying to maintain its uncommon AAA credit rating and calm worries about potential troubles lurking in its huge finance division.

The deal also underscores Buffett's growing role as a rich uncle of sorts to blue-chip corporations, which could use not only his cash but also his gold-plated imprimatur as they try to convince investors that they're above financial reproach.

"It's not just money," said Peter Kenny, managing director at institutional brokerage Knight Capital Group Inc. in Jersey City, N.J. "It's brand. Buffett's dollars are worth more than other people's dollars."

A week ago, Buffett invested $5 billion in Wall Street bellwether Goldman Sachs Group Inc. Scores of other companies have unsuccessfully sought his assistance as the banking system has come under stress.

"It's a shocking comment on today's environment that GE and Goldman would need the reputational shots in the arm that Buffett can provide," said Scott Kolbrenner, an investment banker at Houlihan Lokey in Century City. "In any sane environment, it has been GE and Goldman playing the role that it appears only Buffett can provide today."

The terms of Buffett's GE investment are similar to those he struck with Goldman Sachs and are in line with his long-held strategy of investing in high-caliber companies during periods of weakness.

They also show that the Oracle of Omaha drives a hard bargain.

Buffett's preferred shares pay a hefty 10% annual dividend and can be bought back by the company after three years, but only at a 10% premium.

Buffett also gets warrants to buy GE common stock at any time during the next five years at $22.25 a share. That's 13% below GE's closing price Tuesday of $25.50. The shares fell as low as $23 early Wednesday but spiked on news of the Buffett deal before finishing at $24.50, down $1 for the day.

GE plans to sell $12 billion in common shares to the public as early as today.

The company's quest for capital demonstrates the magnitude of the paroxysm roiling the credit markets.

Firms of all sizes are having difficulty accessing short-term capital and have to pay significantly higher rates for it than just a few weeks ago.

Newspaper publisher Gannett Co. is one of several large companies that have been forced to tap revolving credit lines amid the breakdown in the commercial paper market, which many companies normally rely on to finance routine operations.

Jeffrey R. Immelt, GE's chairman and chief executive, alluded to those issues in a statement.

"In the recent market volatility, we continue to successfully meet our commercial paper needs," he said.

GE said last week that troubles at its GE Capital unit -- which offers commercial loans, home loans and other financial services -- would crimp earnings this year.

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walter.hamilton@latimes.com

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