Bank deal will earn Buffett’s firm $12B

OMAHA, Neb. — Warren Buffett’s bet on Bank of America Corp. is about to pay off with a roughly $12 billion windfall.

The billionaire plans to exercise warrants obtained six years ago from Bank of America while its shares were tumbling amid multibillion-dollar investigations tied to the housing meltdown. The cash infusion helped the bank put to rest doubts about whether it had enough capital, and its shares have more than tripled since then.

In the 2011 deal, Buffett’s Berkshire Hathaway Inc. invested $5 billion in Bank of America in exchange for preferred stock and the right to buy 700 million common shares, a stake now worth $17 billion. Berkshire said in a statement Friday that it would convert its preferred shares into common stock once the Charlotte, N.C.-based bank increases its dividend, now planned for the beginning of the third quarter.

Buffett laid out his thinking for the conversion, which will make him the company’s biggest shareholder, in a February letter to investors, saying the decision would come down to simple math: The preferred investment pays $300 million a year in dividends, so it makes sense to convert that into common stock if those shares began earning more.

After receiving Federal Reserve approval of its capital plan, Bank of America said on Wednesday that it planned to increase its dividend 60 percent to 12 cents a quarter. By converting the preferred stake into common shares, Berkshire’s payout will rise to $336 million a year. The $12 billion in gains comes on top of more than $1.5 billion in dividends from the preferred stake over the past six years.