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Buffett's Berkshire Hathaway to buy Lubrizol for $9 billion in cash

March 14, 2011|By Alistair Barr and Polya Lesova

Reporting from San Francisco — Berkshire Hathaway Inc. has announced that it will buy specialty-chemicals maker Lubrizol Corp. in a deal valued at almost $10 billion as Chairman Warren Buffett puts a big chunk of his cash pile to work.

The Omaha company agreed to acquire Lubrizol for $135 a share in an all-cash deal, which has been approved by the boards of both companies. The deal was announced Monday.

The deal is valued at about $9.7 billion, including around $700 million in net debt. That makes it Buffett's second-biggest acquisition in the last decade, after his 2010 purchase of Burlington Northern Santa Fe Corp., which valued the railroad operator at more than $40 billion, including debt.

Berkshire had $38 billion in cash at the end of 2011. With short-term interest rates still near record lows, that money isn't earning very much. Acquisitions can produce higher returns if they're done at the right price and they target the right businesses.

Buffett told Berkshire shareholders in late February that he was looking for big acquisitions.

Buffett's latest deal values Lubrizol at about seven times earnings before interest, taxes, depreciation and amortization, Jeff Matthews of hedge fund Ram Partners said.

That should "earn him more than the cash is right now," added Matthews, author of "Pilgrimage to Warren Buffett's Omaha."

Still, Matthews also said that Buffett, known as a value investor, is paying up for Lubrizol.

The $135-a-share purchase price represents a 28% premium over Lubrizol's closing price Friday, and is also 18% higher than Lubrizol's all-time high price. The shares rose $29.24, or 27.7%, to $134.68 on Monday.

Lubrizol shares traded below $25 in March 2009 in the wake of the global financial crisis. Since then the stock has surged.

After the deal closes, Lubrizol, which is based in Wickliffe, Ohio, will operate as a subsidiary of Berkshire. It will continue to be led by its current management team.

Lubrizol supplies lubricant additives for engine oils, other transportation-related fluids and industrial lubricants, as well as fuel additives for gasoline and diesel fuel.

Barr and Lesova write for MarketWatch.com/McClatchy.

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