Berkshire Hathaway to pay $9.7 billion for OxyChem, potentially Warren Buffett's last big deal

Berkshire Hathaway is acquiring Occidental Petroleum’s chemical division, OxyChem, for $9.7 billion, a deal potentially marking Warren Buffett’s last major acquisition and signaling a leadership transition to Vice Chair Greg Abel. This transaction, utilizing less than 3% of Berkshire's substantial cash reserves, will enable Occidental to allocate $6.5 billion towards debt reduction, targeting a principal debt below $15 billion, despite a muted market reaction that saw both Berkshire and Occidental shares decline. The deal underscores Berkshire's ongoing challenge in deploying its vast cash and provides strategic deleveraging for Occidental, in which Berkshire already holds a significant stake.

Analysis

Berkshire Hathaway's $9.7 billion acquisition of Occidental Petroleum's chemical division, OxyChem, represents a strategically modest capital deployment for the conglomerate, utilizing less than 3% of its $344 billion cash reserves and thus unlikely to materially impact its bottom line. The market's muted reaction, with Berkshire's shares trading down slightly, reflects this minimal financial impact. More significantly, the deal signals a pivotal management transition, with Vice Chair Greg Abel taking the lead, offering a preview of his M&A strategy as he prepares to succeed Warren Buffett as CEO. For Occidental Petroleum, the transaction is a critical deleveraging event. The company will use $6.5 billion of the proceeds to reduce its principal debt below its $15 billion target, a key step in strengthening its balance sheet following the CrownRock acquisition. However, the divestiture comes at a cost, as Occidental is selling a division whose pre-tax earnings declined to $213 million in Q2 from nearly $300 million in the prior year, and it will retain all of OxyChem's legacy environmental liabilities. The sharp 7% drop in Occidental's shares suggests investor concern over the valuation of the sale or the loss of this business segment, despite the clear balance sheet benefits.

Key Decisions for Investors

• For Berkshire Hathaway investors, this deal is more significant as a signal of management succession and a look into Greg Abel's M&A approach than as a near-term value driver, given its small scale relative to Berkshire's available capital.
• Investors in Occidental Petroleum should weigh the significant positive of accelerated deleveraging and a stronger balance sheet against the negative of divesting a profitable, albeit softening, business unit while retaining its legacy environmental liabilities.
• The transaction deepens Berkshire's existing influence over Occidental, where it already holds over 28% of the stock, and investors should monitor this relationship as it could impact future strategic decisions and capital structure at Occidental.