MARKETWATCH: Buffett almost 'in the money' with Goldman warrants

7:33 p.m. EDT March 23, 2009

SAN FRANCISCO (MarketWatch) -- Goldman Sachs warrants held by Warren Buffett's Berkshire Hathaway are close to becoming a lot more valuable after a sharp rally in the investment bank's shares in recent months.

In early October, Berkshire Hathaway Inc (BRKA) invested 5 billion in Goldman Sachs. GS 114.65, +2.72, +2.4%) , getting 50,000 cumulative perpetual preferred shares in the investment bank that pay 10% a year.

As a sweetener, the deal also included warrants giving Berkshire the right to buy 43,478,260 shares of Goldman common stock. The warrants expire in 2013 and can be exercised for an aggregate cost of $5 billion, or $115 a share.

Soon after the deal, the financial crisis deepened and Goldman shares slumped as low as $47.41 on Nov. 21. That exposed Buffett to some criticism, especially in conjunction with an Oct. 16 New York Times editorial in which he advised readers to buy U.S. equities.

However, Goldman shares have more than doubled since Nov. 21 and closed at $111.93 on Monday. If Goldman stock climbs past $115, Berkshire's warrants will be "in the money."

For example, if shares of the investment bank reach $150, Buffett could, in theory, buy Goldman shares for $115 and sell for the higher price, pocketing $35 as profit, according to Justin Fuller, editor of Web site Buffettologist.com and a partner at Midway Capital Research & Management LLC.

If Buffett exercised all his Goldman warrants in this way, Berkshire could reap more than $1.5 billion in this scenario.

"He was criticized in October and November," Fuller said. "But if the stock continues to rise, those warrants will be valuable for Berkshire investors, validating the deal he did with Goldman."

Still, Berkshire got similar warrants in General Electric (GE)10.80, +0.37, +3.6%) when Buffett invested in the industrial conglomerate on Oct. 16. The GE warrants can be exercised for an aggregate cost of $3 billion, or $22.25 a share.

GE shares closed at $10.43 on Monday, which means Buffett's GE warrants remain deeply out of the money.

Alistair Barr is a reporter for MarketWatch in San Francisco.

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