Commentary: Familiar Territory, Berkshire Wins if it Loses

(BRK.A), (BRK.B)

Warren Buffett and Berkshire Hathaway look to be on the verge of winning Oncor Electric Delivery Co., a Texas-sized prize it has been chasing for the last three years, as the utility struggled under bankruptcy proceedings.

Now, all that stands in its way is a last minute bid by Paul Singer and his hedge fund Elliot Management. The hedge fund is the largest creditor in Oncor’s parent company, Energy Future Holdings Corporation.

Singer scored a recent success when Elliot Management won a delay in finalizing Berkshire’s takeover while it puts together its own offer, reportedly a $9.3 billion bid that would top Berkshire’s $9 billion deal.

The delay moves the bankruptcy court date from August 10 to August 21.

In addition to winning approval from the bankruptcy judge, any deal put together by Berkshire Hathaway or Elliott Management has to pass muster with the Public Utility Commission of Texas (PUC), the agency that regulates the state’s electric and telecommunication utilities, and must rule that any approved acquisition is in the public interest.

The PUC has already rejected two prior takeover bids for Oncor, including last year’s bid from Hunt Consolidated Inc., and April’s bid from NextEra Energy Inc. The failed deals opened the door for Berkshire’s bid.

Berkshire, which entered the energy business in 1999, has built one of the largest utility holding companies, with $85 billion in assets and $17.4 billion in annual operation revenue, as of 2016.

Unlike many failed attempts at merging utilities, Berkshire has repeatedly acquired plum assets, including MidAmerican Energy, PacifiCorp, and NV Energy, and by allowing them to retain their earnings, made them stronger than they were before acquisition.

This is not something that escapes the PUC as it considers who should supply power to 10 million Texas residents, and a host of major manufacturers that need electricity at the lowest possible rates.

As Tony Bennett, president of the Association of Texas Manufacturers, pointed out in a recent editorial, Texas companies in the Oncor service area don’t have a choice of electricity suppliers, so whoever wins the bid has to be focussed on reliable service and low rates, not just the highest return for investors. This is where Berkshire Hathaway Energy excels.

Still, like so many deals that Buffett strikes, he wins even if he loses.

What’s a Hundred or Two Million Between Friends?

Termination fees are familiar territory for Buffett, who walked away with $175 million in 2008 when he refused to get in a bidding war for Constellation Energy. French energy company EDF doubled his offer, but a pile of cash that ran into the hundred millions suited him just fine for his three month pursuit of the Baltimore-based energy wholesaler.

This time, if the Oncor deal falls through, Berkshire will receive a $270 million termination fee.

Not a bad way to lose at all.

But, I wouldn’t bet on Berkshire losing this one.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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