M&A Roundup: Outsiders Warm To Utility Deals

In late October 1999, an investment group led by Berkshire Hathaway Inc. chairman Warren Buffet announced plans to shell out $9.4 billion to buy Des Moines-based, MidAmerican Energy Holdings Co. The move, Buffet’s first foray into the energy sector, immediately set off speculation about whether the deal was a one-time event or whether it marked the first step in a series of acquisitions in the newly deregulated electricity industry. It also created a buzz about whether more non-utility interests will jump into the hyperactive m&a market for utilities. Ed Tirrello, senior utilities analyst at New York’s Deutsche Bank Alex Brown, says he doesn’t see a trend in the making. “Buffet rides the same elevator with the other principals. They probably told him, Look, it’s a slow grower, but it has a good cash flow.’ Buffet likes that,” he says. The deal’s nuts and bolts consist of Berkshire Hathaway and others paying $2.4 billion in cash for MidAmerican, whose market capitalization is about $2 billion. The acquirers also would assume about $7 billion in debt. The deal is scheduled to close in April 2000. Joining Buffet in the transaction are fellow Omahans David Sokol, chairman and CEO of MidAmerican, and Walter Scott Jr., the company’s largest individual shareholder. Upon completion, MidAmerican will be a private company with publicly traded fixed income securities. Some parties have raised questions about the price of the deal. The offer is $35.05 a share, which was approved by MidAmerican’s board on October 24. It amounts to a 29% premium over the stock price immediately prior to announcement of the deal. Naysayers have noted that the $35 range is where the stock was trading in August. Even commentators who feel the price is cheap say that they doubt that any other bidders will contest the deal since that would mean taking on Buffet on his home territory. Financial results for the nine months ended September 30, 1999, show a 29% increase in earnings to $905 million, up from $699 million for the same period in 1998. Net income per diluted share also rose by 39%, to $2.94 from $2.12, for the same period. Tirrello says that MidAmerican has problems in its overseas operations, which account for about 40% of its revenue. In Indonesia, MidAmerican has sued the government for payments it says it is owed. Recently, the company won a final award that directs Indonesia to pay just under $6 million in fees for electricity generated by MidAmerican’s Indonesian subsidiaries. In England, the company has suffered reductions in rate levels by regulators. Meanwhile, the company’s hydroelectric and irrigation project in the Philippines, which was expected to become operational in the fourth quarter of 2000, may be delayed by a few months due to problems that the contractor is experiencing. Certainly, an acquisition by Buffet’s group changes the potential sources of capital for MidAmerican. Past restrictions on what they could afford to buy will likely disappear. According to longtime Berkshire Hathaway watcher George Morgan, vice president at Kirkpatrick Pettis, an Omaha investment bank, “MidAmerican wanted to buy some properties in Illinois last year, but they didn’t have the capital.” Parts of Illinois, along with its home base state of Iowa, and parts of Nebraska and South Dakota make up MidAmerican’s domestic retail market. If Tirrello and others who say this is a one-time deal are wrong, Mid-American will certainly look at future energy sector acquisition projects with access to cheap financing. Berkshire’s financial holdings, as of June 30 , 1999, were stocked with nearly $35 billion in bonds, cash, and other easily convertible instruments. Morgan is among those who expect that the MidAmerican deal is only the opening in a Buffet campaign to acquire energy assets. “We see this definitely as a wedge for more Berkshire Hathaway involvement in energy. I expect them to use this as a base from which to expand into other energy-related businesses,” he says. Morgan says the deregulation of the electricity and natural gas industries will provide numerous opportunities. In an effort to put the Mid-American deal in perspective, Morgan says the move reflects a basic change in Berkshire Hathaway’s philosophy. “Although a lot of people still see Berkshire as a holding company or an investment company, the truth is that it has moved to the point where it is becoming an operating company,” he notes. Beyond the potential financial backing Berkshire will bring to Mid-American, the involvement of Berkshire Hathaway may well be read as an endorsement that the energy industry is ripe for such investments from the outside. Dave Parker, senior utilities analyst at Robert W. Baird & Co., Milwaukee-based investment bank, says he thinks the MidAmerican deal is the start of a push by Buffet into energy properties. However, he added that the larger question raised by the acquisition is whether it will lead to similar deals. “There may be a consensus forming that you have to be huge if you’re going to focus on the upstream activities, such as generation. But for these local utilities, whose main business is distribution, you may be able to survive just selling electricity and gas,” he says. Parker pointed to the $2 billion sale of Portland General Electric Co. by Enron Corp. in late November as evidence that even as energy industry players are consolidating, it is still hard to take on every aspect of the business. “A few years ago Enron was going to succeed at distribution, generation, trading, and most of the other parts of the business. After a few years of owning Portland’s regulated distribution business, they apparently concluded it wasn’t for them,” Parker says. Also noteworthy is the first leveraged buyout of a utility, the $1 billion acquisition of TNP Enterprises Inc., the parent company of Texas-New Mexico Power Co. The investor group is led by William J. Catacosinos, former chairman and CEO of Long Island Lighting Co., and includes CIBC World Markets and others.