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Buffett Hunt for Power Seen Targeting Wisconsin Energy: Real M&A
2014-03-04 03:29:16.519 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Tara Lachapelle and Mark Chediak
March 4 (Bloomberg) -- Warren Buffett’s drive for power is
far from over.
Buffett signaled in his latest annual letter to
shareholders that Berkshire Hathaway Inc.’s MidAmerican Energy
Holdings Co. has the appetite for another “major” acquisition
after paying more than $5 billion last year for an electricity
provider in Nevada. Utilities that meet Buffett’s takeover
criteria include Wisconsin Energy Corp., a $9.8 billion company
with a return on equity of 14 percent in 2013, and Alliant
Energy Corp., according to data compiled by Bloomberg.
“He wants to be offered utility assets” and his remarks
may increase deal flow, said Richard Cook, co-founder of Cook &
Bynum Capital Management LLC in Birmingham, Alabama, without
naming possible targets. If he sees one that fits with existing
operations, is priced attractively and offers better than 10
percent returns, “he’s probably willing to buy,” said Cook,
whose firm owns Berkshire shares.
Wisconsin Energy has a well-respected management team -- a
trait Buffett prefers -- and that utility and Alliant operate in
states with favorable regulatory environments, Gabelli & Co.
said. Alliant is also expanding into renewable energy, which
Buffett signaled could be a focus for large investments,
according to Morningstar Inc. Pipeline master-limited
partnerships such as Plains All American Pipeline LP also would
appeal to Buffett, Robert W. Baird & Co. said.
Kelly Groehler, a spokeswoman for MidAmerican, declined to
comment on its acquisition plans.
Not Done
Brian Manthey, a spokesman for Wisconsin Energy, and Scott
Reigstad, a spokesman for Alliant, said the companies don’t
comment on takeover speculation.
MidAmerican, which generated about $1.8 billion of pre-tax
profit last year, is among Omaha, Nebraska-based Berkshire’s
dozens of non-insurance businesses. In December, the unit
completed its purchase of NV Energy Inc., the largest
electricity provider in Nevada. Including net debt, the
transaction was valued at more than $10 billion, data compiled
by Bloomberg show.
NV Energy “will not be MidAmerican’s last major
acquisition,” Buffett, 83, wrote in his annual letter to
Berkshire shareholders posted on the company’s website March 1.
Buffett said he’s “eager to hear” from companies that
meet his usual criteria. He prefers “simple” businesses with
at least $75 million of pre-tax income, “consistent” earnings
power and “good” returns on equity while employing little or
no debt. He also prefers to keep management in place.
Stable Business
There are 19 utility and pipeline owners with market values
from $5 billion to $30 billion that meet the minimum profit
requirement and have a return on equity exceeding 10 percent,
data compiled by Bloomberg show.
Utilities are typically “predictable, stable and modestly
growing,” Timothy Winter, an analyst at Gabelli, said in a
phone interview. “It’s a business where, if you prudently
invest capital in the business, you can earn a 10 to 11 percent
return on your investment.”
Wisconsin Energy is among the utilities that may appeal to
Buffett, Winter said. The provider of electricity and natural
gas to Wisconsin and Michigan residents earned about $915
million before taxes last year, the data show.
Wisconsin Energy has “an exceptional management team,”
Winter said. And from a regulatory standpoint, Wisconsin and
Michigan are “good states to be in.”
Regulatory Climate
State regulators set allowed earnings at gas and
electricity providers, and some states are more favorable to the
utilities than others, he said. Gabelli is a unit of Gamco
Investors Inc. in Rye, New York.
Alliant, valued at $5.9 billion yesterday, and $4.4 billion
Westar Energy Inc. also could be appealing targets for Buffett,
Mark Barnett, an analyst for Morningstar, said in a phone
interview.
Alliant, which had a 10.4 percent return on equity,
distributes electricity and natural gas to 1.4 million homes and
businesses in Iowa, Minnesota and Wisconsin. Westar, based in
Topeka, Kansas, has about 700,000 customers. Gina Penzig, a
spokeswoman for Westar, said the company doesn’t comment on
speculation.
Both have solid leadership teams, offer the potential for
high growth and require capital investments, Barnett said.
Westar is in the midst of one of the largest capital-investment
programs relative to its size in the U.S., with plans to spend
$3.4 billion from 2014 to 2018 on generation and power lines,
according to Morningstar and company filings.
‘Incredible Advantage’
Buffett “is likely looking at a lot of small, regulated
utilities that have a lot of growth on the table where his low
cost of capital is an incredible advantage,” Barnett said.
These companies “fit the bill.”
Pipeline businesses also may appeal to Buffett because they
typically provide stable streams of cash flow and an attractive
return on investment, said Andy Pusateri, an analyst at Edward
Jones & Co. in St. Louis. A target could be an MLP because many
pipelines have taken on that structure, he said.
MLPs don’t pay federal income taxes and distribute most of
their cash to owners of their units, which trade like shares in
a corporation.
“High-quality MLPs would certainly make good targets,”
Ethan Bellamy, a Denver-based analyst for Robert W. Baird, said
in an e-mail. “How much more potent could one of these firms be
if they had the backing of a giant free-cash-flow machine and no
requirement to time project developments in order to pay stable
distributions to investors?”
Good Value
MarkWest Energy Partners LP, valued at $11 billion
yesterday, and Plains All American, at $19 billion, are two MLPs
that stand out, Bellamy said.
“You would be hard pressed to find a firm that could
produce more value relative to its footprint if given a blank
checkbook than MarkWest,” he said. As for Plains, “if Buffett
wanted to own the single best management team in the single best
segment of MLPs, this would be it.”
MarkWest processes and transports natural gas from U.S.
shale basins including the Marcellus and Utica. Plains
transports crude oil and natural gas liquids.
Representatives for Plains and MarkWest didn’t immediately
respond to phone calls or e-mails seeking comment.
Most MLPs are trading at pricey valuations, which may deter
Buffett, according to Bradley Olsen, a Houston-based analyst at
Tudor Pickering Holt & Co. It’s also more difficult for
MidAmerican to aggressively bid for an MLP company, versus a
competing suitor that’s also an MLP, he said. Berkshire said in
its annual report that it doesn’t participate in deal auctions.
Reinvesting Earnings
“You don’t have that same financing vehicle logic inside
of a large company like Berkshire Hathaway,” Olsen said in a
phone interview. “MidAmerican’s pipelines are kind of buried
inside of an overall stable utility business.”
What makes utilities particularly attractive for Berkshire
is the opportunity to reinvest earnings, Winter of Gabelli said.
Utilities pay 60 percent to 70 percent of their earnings in the
form of dividends, he said, whereas Buffett’s letter said
MidAmerican retained more dollars of earnings than any other
U.S. electricity provider.
“If Berkshire owns these themselves, they don’t have to
pay the dividend and the cash flow can be reinvested back into
the business,” Winter said.
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--With assistance from Noah Buhayar and Dan Kraut in New York.
Editors: Beth Williams, Whitney Kisling
To contact the reporters on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net;
Mark Chediak in San Francisco at +1-415-617-7233 or
mchediak@bloomberg.net
To contact the editor responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net