Berkshire's Lubrizol Buy: What's Behind It?

NEW YORK (TheStreet) -- The engine-lube business looks bright, according to Warren Buffett's most-recent deal, a $9.7 billion acquisition of specialty chemicals manufacturer Lubrizol (LZ).

Announced before the bell Monday, the deal news sent shares of Lubrizol spiking by nearly 30%.
Buffett

Buffett's Berkshire Hathaway ( BRK) holding company has been looking to put its $40 billion cash treasury to work, rather than letting it sit there rotting in our near-zilch-interest-rate environment. In the annual letter that Berkshire sends to shareholders every year, released at the end of February, the Oracle of Omaha said his "trigger finger is itchy" when it came to doing a deal.

Lubrizol, then, would appear to have met all of Buffet's buyout criteria, a list he proffered in this year's letter to holders.

Those included "at least $75 million of pre-tax earnings," "demonstrated consistent earning power," "businesses earning good returns on equity while employing little or no debt," and "simple businesses (if there's lots of technology, we won't understand it)."

Founded in 1928, Lubrizol purports to have invented the engine-oil additives business more than 80 years ago. As its name suggests, the company, based in Wickliffe, Ohio, makes chemicals that go into lubricants used in everything from car engines to metalworking gear -- chemicals designed to improve the fuel economy and the combustion abilities of those engines, among other things.

Lubrizol turned over $5.4 billion in revenue in 2010, and generated cash flow from operations of nearly $690 million. In 2009 and 2008, the company's operating cash flow came to $951 million and $223 million, respectively. The company attributed the see-saw results between 2008 and 2010 to big reductions in inventories and raw-materials costs as Lubrizol looked to contend with the recession. The moves boosted profit margins.

Lubrizol also claims to have the world's largest market share in the lubricant-additives business, beating out such behemoth rivals as Infineum, a joint venture between ExxonMobil ( XOM) and Shell Oil, not to mention Chevron's ( CVX) Oronite unit.

Another competitor is the Afton Chemical subsidiary of NewMarket Corp. ( NEU), the closely held Richmond, Va., company that also develops real estate. NewMarket shares, which are thinly traded, popped nearly 13% Monday to about $147. By midday, volume surpassed 200,000 shares, quadruple the daily average.

Lubrizol marks the Oracle's biggest corporate buyout since an epic $35.7 billion play on railroads, announced in 2009, when Berkshire acquired Burlington Northern. The Lubrizol deal also continues a string of industrials and energy purchases for Buffett and Berkshire. Over the last five years, the holding company's takeovers include power generator MidAmerican Energy, the manufacturing conglomerate Marmon Group and the industrial toolmaker Iscar Metalworking.

News of Buffet's play for Lubrizol pushed the company's stock very near to the offering price ($135 a share, all cash) as the arbitrage traders poured in. The stock was trading recently $133.97, up 27% from the previous close. Volume, of course, was heavy at 6.6 million shares, more than 10 times the daily average.

Still, one couldn't help wondering if Lubrizol's holders felt a little snubbed by the terms of the Berkshire buyout. After all, the deal's structure includes no portion of stock, and Lubrizol holders will receive no coveted Berkshire Hathaway shares.

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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