Warren Buffett’s legendary refusal to pay more than it wants to for an asset has been underlined by the company missing out by around $US450 million on a big energy play in Texas.
US group, Sempra Energy has agreed to buy Energy Future Holdings, the parent company of Texas utility group Oncor, in a deal worth $US18.8 billion.
Sempra will pay approximately $US9.45 billion in cash to acquire EFH and and its ownership in Oncor, and will assume Oncor’s debt.
Berkshire emerged as a credible buyer for Oncor about a month ago after several suitors were blocked by Texas regulators with a $US9 billion cash offer, (Oncor has around $US9 billion in debt).
Oncor is a Texas utility owned by a company called Energy Future holdings which is broke. Oncor is one of its few viable assets.
A key part of Berkshire’s offer was Mr Buffett making clear that Berkshire was happy to keep Oncor independent from the rest of his existing energy group, a move Texas regulators believe would protect the domestic utility group in case the parent ever went bankrupt.
But Elliott Management, the US hedge fund (the one taking on BHP), is the largest creditor of bankrupt Energy Future Holdings and had vowed to oppose the $US18 billion offer, including debt, made in July by Berkshire, arguing it was too low and not in creditors’ interest.
Last week stories emerged that Elliott had bought more debt (from Fidelity) in Oncor which gave him and its head, Paul Singer, the clout to defeat the Berkshire bid. Then US West Coast utility (mostly gas) Sempra Energy emerged on Sunday as the bidder most likely to succeed because it had the backing of Elliott.
After the Elliott move there were reports that Berkshire might lift its offer.
But Mr Buffett and Greg Abel, Berkshire Hathaway Energy chairman and chief executive, said in a statement last Thursday that they stood by their agreement to buy Oncor and did not plan to raise their offer.
“We appreciate the continued opportunity to collaborate with many stakeholder groups in Texas and thank them for their outstanding support, which sets our offer apart from any other bid,” Mr Abel said.
“We’re committed to being an exceptional long-term partner in Texas and our simple, straightforward deal is good for Oncor, its customers and the state.”
Sempra said it would fund the deal using a mixture of debt, equity, and $US3 billion of investment grade debt at the reorganised holding company, and it expects Oncor’s “underlying financial strength and credit ratings” to improve after the deal. But there will be extra debt, -and a total of $US12 billion at least, where as with the Berkshire offer it was $US9 billion.
Berkshire usually makes money from walking away from deals by not either losing on the investment or investing the assigned funds elsewhere.
But the Sempra bid is not home and hosed. A bankruptcy judge need to sign off on the Sempra takeover, as would Texas regulators. Berkshire’s deal was scheduled to go before the judge in Delaware on Monday.
Two of the previous bids were rejected by regulators who were worried that Oncor would be absorbed into the bidder and Texas consumers might suffer. That’s why Berkshire’s offer to leave Oncor as a stand alone company gave it a big advantage. Sempra will have to match that part of the Berkshire offer or the bid will be rejected.
