Warren Buffett’s Berkshire Hathaway will buy Oncor, the US power utility based in Texas for around $US18.1 billion (including debt), adding to his already huge power holdings in the US Midwest and West.
The $US9 billion all cash offer from Berkshire though could be challenged by creditor, Elliott Advisers, the aggressive New York based hedge fund (which is trying to make life tough for BHP).
Elliott owns debt in Oncor’s bankrupt parent, Energy Future Holdings. Reuters reported that Elliott would seek to convert its debt in Energy Futures to equity, as well as raise new equity financing for its bid. As with Buffett’s deal, a bankruptcy judge would have to approve Elliott’s alternative plan, if it happens.
Berkshire’s energy business is expected to take control of Oncor for less than the $US18.4 billion another US utility investor, NextEra Energy had agreed to pay for it a year ago, before that deal was rejected by Texas regulators.
Reuters said that in May, Elliott held about $US2.9 billion of Oncor parent Energy Future Holdings’ roughly $10 billion debt load, with its investment concentrated in a layer of unsecured payment-in-kind (PIK) notes trading at deeply distressed levels. The hedge fund amassed its position in Energy Future’s debt from October to May, according to court papers.
Reuters said the market value of those PIK notes slumped 29% on Friday on news of the Berkshire offer and the market’s belief that it will happen.
That is probably why Elliott is making noises about finding more than $US9 billion in cash to try and top the Berkshire bid – it sounds like it is losing money on the PIK notes.
At the moment the bid will happen and it will be Mr Buffett’s bid will be the largest so far this year for the 86-year old billionaire.
Berkshire finances its deals by using the float in its insurance companies which is now running at close to $US100 billion, despite spending over $US15 billion on shares and deals already this year.
Last year Berkshire acquired Precision Castparts, a US engineering group, for $US32 billion. Earlier this year Mr Buffett teamed with 3G Capital, a Brazilian-based private equity group, to back Kraft Heinz’s misjudged attempt to acquire Unilever for about $US143 billion.
In June Berkshire said it will invest up to $C2 billion for 33% of the country’s biggest sub prime mortgage lender, Home Capital, and last week revealed a $US370 million, 9.8% investment in small industrial property group, Store Capital.
Billions of dollars have been invested in Apple shares, as well as in the shares of America’s four major airlines as well. In fact around $US20 billion has been invested in shares since the election of Donald Trump last November.
And Berkshire will soon move to convert its preferred shares in Bank of America Merrill Lynch into ordinary shares via the payment of $US5 billion. For that Berkshire will become the bank’s biggest shareholder and will be sitting on a capital profit of around $US12 billion.
It will become on of the company’s big shareholdings, along with the near 10% stake in Wells Fargo bank, and stakes of more than 10% in Coca Cola, American Express and IBM.
The sale of Oncor follows a protracted fight among creditors of Energy Future Holdings (a Texas based utility) over how to split the profits generated by the regulated entity, which is considered to be the group’s most valuable asset in the aftermath of a 2014 bankruptcy.
Then called TXU, Energy Future Holdings was acquired in 2007 (just as the GFC was starting) by KKR, TPG Capital and the buyout arm of Goldman Sachs for $US45 billion in the largest ever leveraged buyout, but went bust under the weight of its debts.
Berkshire in fact lost $US1 billion of the $US2.1 billion it spent on junk bonds issued by TXU to help finance the original deal.
The Financial Times says that selling Oncor will allow Energy Future Holdings to settle part of creditors’ bankruptcy claims.
Berkshire Hathaway Energy already owns utilities in Iowa, Nevada and Utah, with a growing portfolio if renewable energy assets, especially wind farms in Iowa and solar power. It also owns utilities in Canada and the UK.
