By Scott Deveau, Noah Buhayar and Matthew Monks
This year isn’t shaping up to be the stuff of Warren Buffett dealmaking legend.
Buffett’s $9-billion bid to acquire Oncor Electric Delivery Co. started to unravel last week after Paul Singer’s Elliott Management Corp. outmaneuvered the Oracle of Omaha by acquiring a small parcel of unsecured debt. That opened a window for Sempra Energy to swoop in and strike a deal to acquire the Texas utility.
The loss comes six months after another multibillion-dollar Buffett pursuit hit the skids.
In February, his Berkshire Hathaway Inc. committed $15 billion to help Kraft Heinz Co. in a proposed buyout of Unilever. The Anglo-Dutch consumer goods giant rejected the approach, and the offer was quickly pulled.
The collapse of two high-profile pursuits in such a short time frame is a rarity for Buffett, who has spent decades building Berkshire into a sprawling conglomerate through shrewd takeovers. While he’s made many offers that went nowhere, it’s less common for such losses to play out in public.
Elliott’s purchase from Fidelity Investments of $60 million worth of leveraged notes in Oncor’s parent, Energy Future Intermediate Holding Co., was all it needed to do to block Buffett’s bid, according to people familiar with the matter. Buying the notes allowed the activist investor and another dissenting creditor to own the majority of all classes of impaired debt in the company, all but assuring that a bankruptcy judge would reject Buffett’s bid, said the people, who asked not to be identified because the matter was private.
Berkshire’s energy unit was aware of the risk posed by the Fidelity notes, the people said. But purchasing the debt would have disqualified those votes in favor of the transaction, according to the people. Typically, bankruptcy courts only require one group of unsecured creditors to support a takeover bid.
Berkshire Hathaway Energy declined to comment on its handling of the deal after saying in a statement Monday that Energy Future had terminated the offer. Buffett didn’t respond to a request for comment.
Sempra’s Opportunity
Squaring off against Buffett wasn’t a factor for Sempra, said Chief Executive Officer Debra Reed.
“When the Berkshire deal looked like it was not going to get creditor support and then the creditor deal looked like it was not going to get regulatory support,” Reed said, “we saw an opportunity to come in with a transaction that we thought would meet the needs of both the creditors and the regulators.”
Berkshire’s loss of two big opportunities this year “calls into question the effectiveness of their gentleman’s agreement acquisition strategy,” said Cathy Seifert, an equity analyst at CFRA Research who has a hold rating on Berkshire.
“It’s going to get tougher and tougher to earn the reputation” for savvy dealmaking “unless something in this trajectory changes pretty quickly,” Seifert said.
Buying the debt was an elegant solution for Elliott, which will get 45 cents to 50 cents on the dollar for its investment if Sempra’s $9.45 billion bid wins approval. That compares to the 18 cents on the dollar that Elliott would have gotten from a Buffett victory.
Road Map
Berkshire, along with Elliott, ended up providing a road map for Sempra to acquire Oncor. Elliott had held talks about a month ago about partnering with Sempra on its $9.3 billion bid for the company, along with several other US and Canadian utilities, as well as sovereign wealth, infrastructure and pension funds, the people said. Sempra ultimately determined it was in its best interest to go it alone at a higher price, according to those people.
Berkshire had agreed to 47 regulatory commitments that were aimed at helping it win court approval and protect Oncor from unnecessary risk, including having no debt at the intermediate companies. It said in a statement Friday that those commitments had resolved all issues involving Oncor.
Sempra is comfortable upholding those commitments, which won over some stakeholders and the staff at the Public Utility Commission of Texas, the people said.
Elliott provided a benchmark when it said it was trying to drum up the finances for its own bid valued at $9.3 billion, meaning it would be hard for the New York hedge fund to oppose a bid higher than that threshold, the people said.
One of the people said it was Elliott’s experience in the rough and tumble bankruptcy space that gave it an edge over Buffett.
Berkshire felt its own proposal was sufficiently formed and had the support needed to win approval from the bankruptcy judge, the people said. Once Elliott bought the debt from Fidelity, however, Berkshire was blocked, they said.