Berkshire & DOW Convertible Preferred Deal from 2009
"Dow turned to Buffett to help finance its acquisition of Rohm & Hass for more than $16 billion. Omaha, Nebraska-based Berkshire can exchange its preferred stake for about 72.6 million shares of the chemical maker’s common stock at a conversion price of $41.32 each."
We still earn 8.5% on our $3 billion investment in the convertible preferred shares of DOW which is now also above the conversion price.
"Dow Chemical/Rohm & Haas (NYSE: DOW)
First Shares Purchased: 2009
Buffett is sitting on a gain today from his investment in The Dow Chemical Company (NYSE: DOW) when he came in with $3 billion to assist Dow to acquire Rohm & Haas for $18.8 billion in 2009. He effectively became the single largest shareholder in the larger Dow Chemical Company after acquiring 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock in Dow Chemical Company. Under certain conditions, each preferred share is convertible into 24.201 shares of Dow common stock, but the preferred share comes with dividends at a rate of 8.5 percent per year. Beginning in April 2014, if Dow’s common stock price exceeds $53.72 then Dow can elect to convert the Dow preferred shares into common stock at the applicable conversion rate. Calculating a total return if things remain static is no easy task today and would require having access to the purchase agreement contract, but the underlying Dow common stock has risen from $10 (and under $10) up to around $36.00. In retrospect, buying the common stock would have made more profits, but if you take the 8.5 percent per year into consideration Buffett’s income out to 2014 will bring in more than $1.27 billion in interest income – without the effect of the higher value in the shares. The preferred shares might not participate in as much gains as the common shares, but Buffett made this investment when many investors wanted to be much higher in the capital structure due to the economic uncertainty of the time."
The CEO has talked about wanting out but of course he cant do that unless he forces conversion when Dow gets to $53.72 (trades at $46 today). Of course at that point, berkshire would have about $4 billion of dow common. He has said that he's talked to Buffett about how to get rid of the preferreds but I Imagine it would have to take a pretty good offer to get buffett to sell.