NEW YORK - Warren Buffett struck a deal with BAC last week that will see the CEO of Berkshire Hathaway invest $5 billion in BAC preferred shares with a 6% dividend yield and a 5% premium redemption fee. This alone would be attractive to Buffett but likely not good enough to make a deal.
The second part of the deal is 700 million warrants at 7.14 a share. These warrants allows Buffett the opportunity to buy this amount of shares at this price. However what is the actual value of these warrants.
Let us try to derive a conservative value for these warrants.
The first one will be looking at the general market. The general market gives a premium of $2.65 per option for 2013 options at a $7.5 strike price. On 700 million shares that alone is worth $1.855 billion. Meaning on the most conservative basis Buffett's fair value of his option is worth at least this amount.
Given the long length of his option and the relatively low price BAC trades at currently. It is possible that someone would be willing to pay at least a $7 premium for the warrants alone. Meaning Buffett is already up $5 billion on his investment.
Buffett could likely sell his right to the warrants for a huge amount. Though he is unlikely to do so.
Investors seem to be shrugging off the hugely favorable terms Mr. Buffett was able to receive for his company. The warrants can already be sold at a $910 million gains excluding the time premium on the warrants. The fair value of these warrants is likely close to $5 billion which was given to Buffett for free.
Totally agree....if BAC did not NEED capital...why give such a favorable deal?? I believe Buffet saw the Shorts feeding on BAC and teamed with BAC to punish them. In any case...seems that SEC should take a look....doesn't smell right.
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