Update: Buffett Stuns Wall Street With Offer to Pay 56% Premium for Shaw - TheStreet

Updated from 4:24 p.m. EDT

Warren Buffett, the ultimate value investor, stunned Wall Street Wednesday by offering to pay a 56% premium for

Shaw Industries

(SHX)

, the nation's largest carpet producer.

Buffett's

Berkshire Hathaway

( BRK) said it would

buy 80.1% to 86% of Shaw's outstanding stock in a deal valued at more than $2 billion.

Under the terms of the deal, Berkshire, the Omaha-based insurance group that serves as Buffett's investment vehicle, will pay Shaw's shareholders $19 in cash for each of their shares. That price contrasts with Shaw's closing price Tuesday of $12.19 a share. The carpet company's stock had lost about 40% of its value over the past year, since peaking at a 52-week high of $20.88 last September.

Shares of Shaw Industries leapt as high as $6.62, or 54%, to $18.81 after the announcement, before ending the day slightly lower at $18.63. Berkshire Hathaway Class A shares were down $1,250, or 2%, at$58,000.

The deal is consistent with Buffet's investing strategy of buying large stakes in companies with the intention of holding onto the stock for a long time.

While Shaw Industries' stock price has slipped over the past year, analysts say its performance has been consistent with those of other "value" stocks, which have largely been overlooked by investors this year who opted instead to put their money in high-growth sectors like technology and biogenetics.

"The stock market in total has shunned value stocks. If this environment had been different, the stock wouldn't be at $12," said Kay Norwood, analyst at

Wachovia Securities

. "He (Buffett) is getting a very high quality, well-run company."

While she agreed the premium appeared high based on Tuesday's closing price, Norwood pointed out that Shaw Industries' stock had been trading above $20 last year. Wachovia had a "strong buy" rating on the stock with a $19 long-term target price.

Norwood said she downgraded the stock Wednesday to a neutral rating after the price skyrocketed following the late morning announcement, since the downside risk now outweighed the upside potential. "If the deal doesn't go through, the stock may not go back to $12 but it would give up some gains," she explained.

Wachovia does not underwrite Shaw Industries.

If completed, Buffett's proposed purchase would be just the latest in a series of similar deals within the home furnishings industry. Last month, Berkshire Hathaway completed its purchase of more than 95% of

Justin Industries (JSTN)

, which includes

Featherlite Building Products

and

American Tile Supply

.

Buffet's holding company is also a majority owner of

Nebraska Furniture Mart

, one of the nation's largest home furnishings retailers.

Jordan's Furniture

and

Star Furniture

stores and

RC Willey Home Furnishings

are also subsidiaries of Berkshire Hathaway.

Nonetheless, Stephen East, an analyst at

A.G. Edwards & Sons

, said Shaw Industries seemed an unlikely takeover target. The carpet company has had only modest sales growth in the past year. While the stock fetched more than $20 a year ago, it has not traded above $17 in 2000, and slipped below $11 a share in the spring.

Shaw Industries reported an 11% decline in earnings last quarter, while year-over-year sales grew just 4%. The company also announced it had begun restructuring its sales force. Its subsidiary,

Flooring America

, filed for bankruptcy earlier this summer.

"They've struggled for a variety of reasons, and they've had a tough time recovering," East said.

He currently has a "maintain" rating on Shaw Industries, with a long-term price target of $19, pending the transaction. A.G. Edwards does not have an underwriting relationship with Shaw Industries.

Berkshire Hathaway's offer is contingent upon Robert E. Shaw, chairman and chief executive, and Julian D. Saul, president, and members of their immediate families retaining a minimum 5% ownership interest in the carpet company. Other management executives and members of the Shaw and Saul families would own the remaining shares not purchased by Berkshire Hathaway.

Berkshire Hathaway has offered to purchase up to 10% of the shares held by the company's top executives and their families, and up to one-third of the shares held by other management executives and family members each year, beginning on March 31, 2001, at a price equal to $19 per share plus the increase in book value from Dec. 31, 2000.

Shaw's board has appointed a special committee to consider the offer. While the company has not offered a timeframe for completion of the transaction, it indicated that Berkshire Hathaway would like to complete the deal as soon as possible.

Officials at Shaw Industries and Berkshire Hathaway were not immediately available for comment.

Shaw Industries would continue to be operated under its current management and will keep its corporate headquarters in Dalton, Ga.