Warren Buffett bags a bargain

The good thing about not following the herd, is that in the long run, it delivers you opportunities that no one else can take advantage of.

Warren Buffett, largely seen as one of the world’s top investors, spent most of the credit boom sitting on his hands. Sure, he made a few deals, but nothing spectacular. Largely, while everyone else was borrowing like mad, he amassed an even bigger cash pile than he already had.

Of course, now that credit is a dirty word, and basic, non-derivative-based hard cash is suddenly worth something again, that cash pile is in demand.

And that means Mr Buffett is suddenly doing deals again…

Buffett’s hard cash buys him a half-price chunk of Wrigley

Warren Buffett is helping confectionary giant Mars to take over chewing gum group Wrigley. Mars is stumping up $80 a share, or $23bn in total, of which Mr Buffett will provide $4.4bn. The rest of the money is coming from JP Morgan and Goldman Sachs.

What does Mr Buffett get out of it? A 19% chunk of Wrigley, for the trifling sum of $2.1bn – pretty much half-price.

Chairman Bill Wrigley Jr said: “There’s no question that the financial markets are very challenging right now and coming up with the financing was a challenge.” Which is why people with deep pockets and large savings piles, like Mr Buffett, are able to command such attractive terms in return for their support.

The deal will make the combined group into the largest confectioner in the world, reports The Times, with a 14.4% market share, pushing Cadbury Schweppes into second place on 10.1%. Mr Buffett is well known for his general fondness for the sector, which he believes is about as recession-proof as you can get.

And it’s a good thing too, because he also expects that “the recession will be longer and deeper than most people think – this will not be short and shallow.”

This is a view that commentators are gradually coming round to – at least as far as the US goes. More than a few research notes predicting a U-shaped (long trough), rather than V-shaped (short and sharp, followed by a rapid recovery) recession for the US.

Many people still think however, that the UK will be just fine – not least our Chancellor, Alistair Darling. Sadly for Mr Darling, even the EU disagrees with him. The European Commission yesterday said that the UK’s economic growth would slow to 1.7% this year, at the bottom end of the Government’s forecasts for 1.75%-2.25%.

But where the Treasury sees a miraculous rebound to 2.25%-2.75% growth next year, the Europeans reckon we’ll see 1.6% growth in 2009.

I still think this is rather optimistic, but at least it’s going in the right direction. Given that Britain will be in the midst of a fully-fledged housing slump at that point, accepting reality now and making some preparation for the downturn would be a good idea.

Banks are finally accepting reality

You can’t of course, expect the government to accept reality – it would rather spin it out of existence. But the banking sector looks as if it’s being a little more realistic. Britain’s biggest mortgage lender, HBoS, as was widely flagged in the weekend press (see yesterday’s Money Morning for more: Why HBoS should jump at the chance to raise cash), has decided to go ahead with its £4bn rights issue. The group will offer to sell two new shares for every five at 275p a share, 45% below Monday’s close of 495.75p. Shareholders will have until August 7th to decide whether to take up the offer or not.

The dividend will also take a hit, unfortunately. The bank will cut its dividend payout ratio from 46% to 40%, while the interim dividend will be paid in shares. It still aims to pay the final dividend in cash.

Meanwhile, it has taken about £2.8bn in writedowns. The bank is also targeting a core Tier 1 ratio of between 6% and 7%, which would put it at the higher end of the banking sector, and also raises the game a little on RBS’s aim for 6%.

Chief executive Andy Hornby said he expects house prices to fall by “mid-single digits” both this year and next. The bank warned that it also expects bad debts to rise this year.

The move to raise money seems a wise decision. It’ll be uncomfortable for management and shareholders just now – particularly after HBoS’s indignant reaction to the recent rumour-fuelled share price collapse – but better to make a cash call now than have to do it later.

Rival banks who have dismissed the idea, such as Bradford & Bingley, may come to regret it. We’ve regularly warned readers to ignore tempting dividend yields and stay away from the banks, and we’re certainly not changing our tune yet.

Turning to the wider markets…


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The FTSE 100 closed just 1 point lower at 6,090. Miners were among the main risers amid bullish comments from Credit Suisse.

Across the Channel, the Paris CAC-40 rose 34 points to end the day at 5,012. And in Frankfurt, the DAX-30 gained 28 points to 6,925.

On Wall Street, US stocks were broadly flat. The Dow Jones fell 20 points to end at 12,871. The broader S&P 500 slipped 1 point to end the day at 1,396, while the tech-heavy Nasdaq gained a point to close at 2,424.

In Asia this morning, the Hang Seng index rose 247 points to 25,914, while Australia’s S&P/ASX was up 4 points at 5,606. Japanese markets were closed for a public holiday.

Crude oil was trading at around $118.12 in New York. Meanwhile Brent spot was trading at $115.30.

Spot gold was trading at around $887 an ounce this morning, while silver was trading at $16.87. Platinum traded around $1,947.

Turning to forex, sterling was trading at 1.9813 against the dollar, and at 1.2716 against the euro. The dollar was last trading at 0.6423 against the euro and 104.16 against the Japanese yen.

We have mentioned a few times that buying the oil majors when oil was over $100 a barrel was probably a good idea. This morning, both BP and Royal Dutch Shell have beat City forecasts for the first quarter due mainly to – surprise, surprise – the record price of oil.

Our recommended articles for today…

Does the pub industry have a future?
– Tom Bulford looks at the pub industry and sees a dark future. It’s in decline, with apparently four pubs closing down every day. Like bingo halls, bowler hats, pigeon racing and dirty week-ends in Brighton will pubs, too, soon belong to a lost age? To find out if you need to get your cash far away from the pub industry, read:
Does the pub industry have a future?

How expensive is printing money?
– It now costs 1.7pennies to make a penny coin – the more the government increases the money supply, the less value each penny has. Max Raskin thinks this is unnecessary and wonders – do we need inflation? Are we heading down a path where, like in Zimbabwe, it will cost 5 million pounds for three loaves of bread? To find out how government inflation can be combated, click here:
How expensive is printing money?

Our recommended articles for today…

Does the pub industry have a future?
– Tom Bulford looks at the pub industry and sees a dark future. It’s in decline, with apparently four pubs closing down every day. Like bingo halls, bowler hats, pigeon racing and dirty week-ends in Brighton will pubs, too, soon belong to a lost age? To find out if you need to get your cash far away from the pub industry, read:
Does the pub industry have a future?

How expensive is printing money?
– It now costs 1.7pennies to make a penny coin – the more the government increases the money supply, the less value each penny has. Max Raskin thinks this is unnecessary and wonders – do we need inflation? Are we heading down a path where, like in Zimbabwe, it will cost 5 million pounds for three loaves of bread? To find out how government inflation can be combated, click here:
How expensive is printing money?

Our recommended articles for today…

Does the pub industry have a future?
– Tom Bulford looks at the pub industry and sees a dark future. It’s in decline, with apparently four pubs closing down every day. Like bingo halls, bowler hats, pigeon racing and dirty week-ends in Brighton will pubs, too, soon belong to a lost age? To find out if you need to get your cash far away from the pub industry, read:
Does the pub industry have a future?

How expensive is printing money?
– It now costs 1.7pennies to make a penny coin – the more the government increases the money supply, the less value each penny has. Max Raskin thinks this is unnecessary and wonders – do we need inflation? Are we heading down a path where, like in Zimbabwe, it will cost 5 million pounds for three loaves of bread? To find out how government inflation can be combated, click here:
How expensive is printing money?


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