Mazor'sEdge

(BRK.A), (BRK.B)

Monday’s hearing before Judge Christopher Sontchi in U.S. Bankruptcy Court in Delaware, could decide the fate of Berkshire Hathaway’s $9 billion bid for Oncor Electric Delivery. It’s the latest round of a high stakes poker game that has seen all the players trying to strengthen their hands.

For Berkshire, the key to whether it wins the right to acquire the utility may not just be whether Warren Buffett can prevail over Paul Singer’s Elliot Management, but also the judge’s response to a third bid offering $9.45 billion, which is said to be coming from Sempra Energy of San Diego.

Paul Singer and Elliot Management’s strong hand comes from its status as the largest owner of every class of impaired debt. The hedge fund recently purchased $60 million of leveraged buyout notes to cement that status. And, while Singer has talked of putting together a bid to top Buffett’s offer, he could just as well side with Sempra’s offer.

Another Player Comes to the Table

Sempra Energy could have a strong hand of its own, as it is a credible bidder. Sempra was created in 1998 by a merger of parent companies of two long-established, and highly respected, investor-owned utilities — Los Angeles-based Pacific Enterprises, the parent company of Southern California Gas Co., and Enova Corporation, the parent company of San Diego Gas & Electric by a merger of parent companies of two long-established, and highly respected, investor-owned utilities — Los Angeles-based Pacific Enterprises, the parent company of Southern California Gas Co., and Enova Corporation, the parent company of San Diego Gas & Electric. Today it has 16,000 employees and serves 32 million customers worldwide.

Is the Key the Support of the Stakeholders?

Berkshire’s aces come from an approach that has focused on lining up support from the stakeholders that receive power from Oncor. Five key Texas stakeholder groups have all endorsed Berkshire’s bid.

On Friday, Berkshire Hathaway Energy announced that the Staff of the Public Utility Commission of Texas, Office of Public Utility Counsel, Steering Committee of Cities Served by Oncor, the Texas Industrial Energy Consumers and the IBEW Local 69 have entered into a settlement agreement with Berkshire Hathaway Energy.

The agreement resolved all issues in Berkshire Hathaway Energy’s acquisition of Oncor.

By entering into the settlement, the parties agreed that the acquisition is in the public interest, meets the statutory standards and will bring substantial benefits to Oncor and its customers. The parties to the agreement ask the Public Utility Commission of Texas to approve the acquisition consistent with the enhanced commitments in the agreement.

Will Berkshire Raise its Offer?

Both Greg Abel, Berkshire Hathaway Energy chairman and CEO, and Warren Buffett, have stated the company will stand firm on its $9 billion offer to acquire 80% of Oncor and will not be increasing its offer. Berkshire will collect a $270 termination fee if its offer is rejected.

Berkshire is hoping that in the end Judge Sontchi is persuaded by the support of 12 key stakeholder groups across Texas for Berkshire’s bid.

“The strong coalition of stakeholders consistently express the appropriate concerns and necessary protections for Oncor and its customers,” said Abel. “We stand ready to deliver on and exceed the regulatory commitments

In any case, Monday is looking like the decisive day in the fate of Oncor. Like a poker game of Texas Hold ‘Em, all the cards will be on the table.

© 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.

(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.