Bank of America said Thursday that it was selling 50,000 shares of preferred stock with a liquidation value of $100,000 per share and a dividend that pays 6% per year to Berkshire Hathaway. The deal is proving popular with investors, though at least one equity analyst is strongly displeased with it because the bank will pay too high a price for the investment.
“Bank of America is a strong, well-led company, and I called [CEO] Brian [Moynihan] to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and CEO Warren Buffett in a statement. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That’s what customers want, and that’s the company’s strategy.”
BofA shares (BAC) were up about 11% and traded near $7.73 in afternoon trading. The troubled bank’s value has dropped sharply this year due to concerns over its need to raise capital and liabilities tied to subprime mortgages. (Its shares traded above 15 in mid-January.)
As part of the deal, Berkshire Hathaway will also receive warrants to purchase 700 million shares of Bank of America common stock at an exercise price of about $7.14 per share. The aggregate purchase price for the preferred stock and warrants to be received by Bank of America, which bought Merrill Lynch in early 2009, is $5 billion in cash.
Rochdale Securities analyst Dick Bove, who has covered BofA and Merrill for many years, says the arrangement with Buffett is not good for the bank, noting that Moynihan (left) repeatedly said in the recent past that the bank did not need to raise additional capital.
“He’s gone back on his word,” Bove said in an interview with TheStreet.com. “That is, I think, a big negative given his credibility is under such question. Now why did he do it? He did it because he needed to buy credibility.”
About a month ago, Bove had advised investors to get out of the stock market. After bank stocks fell markedly on Wednesday, he suggested that they be bought. In addition, he said BofA shares would have likely rebounded without Buffettt’s investment.
The investment, in his view, comes at too steep a price. “There’s no way the bank can make money,” he said, given a yearly $300 million dividend to pay. In addition, Buffett has warrants to buy the stock at a good discount, according to Bove.
BofA, of course, had a different view of the Buffett’s investment. “We are building the best franchise in financial services and we have laid out a clear plan to deliver long-term shareholder value,” said Moynihan in a press release. “I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”