Billionaire Warren Buffett's Berkshire Hathaway Inc struck a deal to buy lubricants maker Lubrizol Corp for $9 billion, betting on a global economic recovery.
The deal is Berkshire's biggest since it bought Burlington Northern Santa Fe for more than $26 billion in late 2009. It extends the trend of Berkshire expanding in basic industries, which includes Buffett's recent deals for Marmon Holdings and Israel's Iscar Metalworking.
Berkshire, which had amassed about $38 billion of cash by the end of last year, will acquire Lubrizol for $135 per share, about a 28 percent premium to its closing price on Friday. Berkshire will also assume about $700 million of Lubrizol's debt.
Lubrizol's shares soared more than 27 percent to $133.95 in late-morning trading. Shares of NewMarket, one of the chemical company's closest competitors, were up 12 percent.
Lubrizol makes lubricants for engines, especially large trucks, buses and boats. Demand for the company's products should continue to rise as shipping of goods increases around the world.
In February, the company posted a strong quarterly profit and issued a bullish forecast for 2011, signaling that demand for lubricants was improving along with the economy.
About 65 percent of the company's sales were from outside North America last year.
Lubrizol is exactly the sort of company with which we love to partner -- the global leader in several market applications run by a talented CEO, Buffett said in a statement on Monday.
The company will continue to be led by its current management team under James Hambrick, the companies said.
BET ON GLOBAL RECOVERY
Just two weeks ago, Buffett told Berkshire shareholders that he was searching for new acquisitions.
Our elephant gun has been reloaded, and my trigger finger is itchy, the 80-year-old investor wrote in his annual letter.
Thomas Russo, who helps invest more than $3 billion at Gardner Russo & Gardner, said he believes the investment is positioned to take advantage of increasing demand for Lubrizol's products as emerging economies around the world industrialize further. Some 11 percent of Gardner Russo & Gardner holdings are invested in Berkshire shares.
It's certainly a full price -- especially if you think back what the opportunity could have been had they bought at the bottom of 2008 or 2009's market sell-off, Russo said. But it's all about the forward looking returns and I suspect that the rest of the world's demand for the products will grow.
Mark Gulley, a chemicals analyst for Soleil Securities who does not cover Lubrizol, said he believed that in paying about 12 times expected 2011 earnings, Buffett was getting a relative bargain.
By comparison, Nalco, another specialty chemicals company, was trading at roughly 16 times forward earnings. NewMarket had closed at under 10 times expected 2011 earnings.
Wickliffe, Ohio-headquartered Lubrizol, founded in 1928 but which traces its roots as far back as the 1870s when it began as BFGoodrich Performance Materials, employs 6,900 staff worldwide.
Earlier this year, Lubrizol agreed to buy rival Nalco's personal-care business, which makes ingredients for hair, skin and home-care products, for $166 million.
Citi and Evercore Partners are acting as financial advisers to Lubrizol, which owns and operates plants in 17 countries.
(Additional reporting by Thyagaraju Adinarayan in Bangalore, Jonathan Stempel in New York and Ernest Scheyder in Chicago; editing by Dave Zimmerman and Maureen Bavdek)