How Buffett got Lubrizol at Lehman-bust valuation

Warren Buffett is still getting the same discount for his takeover of Lubrizol even after the maker of engine lubricant almost tripled since the billionaire investor said it was time to start buying US equities.

Berkshire Hathaway will pay about $9 billion for Lubrizol in its second-largest purchase since Buffett said in October 2008 he was staking his personal fortune to American stocks. While Lubrizol surged 183 per cent over that span, its equity and net debt was valued at 5.8 times earnings before interest, taxes, depreciation and amortistion prior to yesterday’s announcement, according to data compiled by Bloomberg. That compares with 5.7 times when Buffett made his comments a month after Lehman Brothers Holdings collapsed.

Even with a 24 per cent premium, the Ebitda multiple that Buffett is paying for Wickliffe, Ohio-based Lubrizol is still the cheapest for a specialty chemicals company in 12 years, data compiled by Bloomberg show. Lubrizol has doubled earnings and its operating margin in the past two years and controls 35 per cent of sales in an industry dominated by four companies.

“Being an excellent investor means you don’t overpay,” said Brian Barish, Denver-based president of Cambiar Investors, which oversees $7 billion. “It’s a pretty good deal for Buffett in terms of the kind of stuff that he tends to gravitate towards.”

Barish’s $1.44 billion Cambiar Opportunity Fund has outperformed 99 per cent of rival funds over the past year.

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer. Julie Young, a spokeswoman for Lubrizol, didn’t respond to a telephone call and e-mail.

The Lubrizol deal comes two weeks after the billionaire said in his annual letter to shareholders on February 26 that he was looking for “more major acquisitions,” a year after spending $26.5 billion to buy Burlington Northern Santa Fe railroad in his largest purchase.

Buffett said Omaha, Nebraska-based Berkshire, whose cash rose to a three-year high of $38.2 billion, needed more buyouts and that his “trigger finger is itchy”.

Lubrizol, the world’s largest producer of lubricant additives, was one of more than 40 companies that Bloomberg identified this month that fit criteria listed in his letter.

Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, according to his report.