Warren Buffett unveils $9.7 billion takeover for US lubricants maker Lubrizol

He warned us. Just two weeks ago in his annual letter to Berkshire Hathaway investors, veteran investor Warren Buffett said he was on the hunt for a really big acquisition and was desperate to do a deal.

“Our elephant gun has been reloaded, and my trigger finger is itchy,” the 80-year-old investor wrote in his annual letter.

Overnight, Buffett unveiled his latest big deal – the purchase of Ohio-based lubricants maker Lubrizol Corp, which manufactures lubricants for engines in large trucks, buses and boats, and also makes chemical products used in hair, skin and home care products.

Berkshire will pay $9 billion for the business, which is a 28% premium to the company’s latest share price. Berkshire will also assume $700 million of Lubrizol’s debt.

The deal stands out as a classic Buffett play – it’s a business that is relatively simple, already quite profitable and should grow strongly as the global economic recovery gathers pace.

“Lubrizol is exactly the sort of company with which we love to partner,” Buffett said in a statement released overnight.

As is typical of Berkshire acquisitions, the management team at Lubrizol will remain in place under current boss James Hambrick.

One question sparked by the deal almost immediately was whether Buffett had paid too much for the business – Berkshire shares fell 1.7% after the announcement of the deal, on a day when the broader market was down by about 0.7%.

One of the concerns is that Buffett has offered what is clearly a “knockout” price – his $135 a share offer is 18% higher than Lubrizol shares have traded in their history.

There are also concerns that high oil prices could impact the company’s profitability.

Thomas Russo of investment firm Gardner Russo & Gardner, which owns Berkshire stock, told Reuters the investment was a bet on the continued industrialisation of emerging economies.

“It’s certainly a full price – especially if you think back what the opportunity could have been had they bought at the bottom of 2008 or 2009’s market selloff,” Russo said.

“But it’s all about the forward looking returns and I suspect that the rest of the world’s demand for the products will grow.”

The Lubrizol deal is Buffett’s biggest since his $34 billion deal to buy railway operator Burlington National in early 2010.