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GE to sell $12 billion of stock; Buffett to take stake
Moves aimed at bolstering confidence in struggling conglomerate

By Matt Andrejczak, MarketWatch
Last Update: 5:04 PM ET Oct 1, 2008

SAN FRANCISCO (MarketWatch) -- General Electric Co., its financial business stung by a growing credit crisis worldwide, said Wednesday it is launching a stock offering to raise $12 billion in cash and conducting a private deal with billionaire investor Warren Buffett.

It is the second time in as many weeks that Buffett has been tapped by one of America's marquee companies for capital. Through his investment vehicle Berkshire Hathaway, Buffett is investing as much as $10 billion in Goldman Sachs Co. to help the venerable investment bank navigate its way through the global credit crunch.

Now in a move aimed at bolstering confidence in GE, Berkshire Hathaway struck a five-year deal with the struggling conglomerate. It calls for Berkshire to buy $3 billion of GE's preferred stock at a guaranteed 10% dividend that are callable by 2011.

It further gives Berkshire (BRKA) warrants to purchase $3 billion of GE's common stock at a strike price of $22.25 a share. The warrants can be exercised anytime through 2013.

"GE is the symbol of American business to the world," Buffett said in a statement. "I am confident that GE will continue to be successful in the years to come."

GE (GE) said the public offering of $12 billion of common stock will be priced before the U.S. stock market opens Thursday. Goldman Sachs (GS) is handling the deal.

Jeff Immelt, chief executive officer at GE, said the deals will allow GE to "play offensive in this market should conditions allow."

Before the transactions were announced, GE shares had tumbled as much as 10%. The shares took a hit over worries about GE Capital, while at the same time, credit default swaps on GE hit a record high in trading. Credit default swaps are private insurance contracts on GE debt.

In trading Wednesday, GE shares fell almost 4% to $24.50.

Deutsche Bank cut its 2008 earnings forecast on GE to $2 a share, from $2.20, and shaved GE's stock-price target to $26, from $28. Analyst Nigel Coe expects GE to face an even tougher road next year: He estimates GE will earn $1.95 a share in 2009.

"Our adjustments largely reflect deterioration at GE Capital -- driven by tighter credit markets, asset shrinkage and debt pay-down," Coe wrote in a research note.

GE (GE) makes about 45% of its earnings from the financial unit, called GE Capital. Coe said his revised forecast calls for a 28% decline in GE Capital's segment earnings to $2.1 billion due to mark-to-market write-downs on some of the unit's holdings.

Investors have been growing more skeptical of GE due to its exposure to the troubled U.S. mortgage market. The stock, a component of the Dow Jones Industrial Average, is down 34% so far this year. By comparison, the Dow is down 18%.

Last week GE warned 2008 earnings may be as much as 15% lower than it earlier predicted and said it would halt a stock-buyback program to maintain the AAA credit rating that's so important to its financials business. See earlier GE story.

At the time, it pegged 2008 earnings at between $1.95 and $2.10 a share, down from the prior forecast of $2.20 to $2.30 a share. It maintained its annual dividend of $1.24 a share.

GE reports third-quarter results Oct. 10.

Matt Andrejczak is a reporter for MarketWatch in San Francisco.