Berkshire’s Abel Builds Buffett Energy Unit With Purchase
Greg Abel, who helped build Berkshire Hathaway Inc. (BRK/A)’s utility business MidAmerican Energy Holdings Co., is showing that he’s earned the trust of his boss, Warren Buffett, after striking a $5.6 billion deal for NV Energy Inc. (NVE)
MidAmerican said that it would buy Las Vegas-based NV Energy for $23.75 a share in cash, or about 23 percent more than yesterday’s closing price, to expand in Nevada. The transaction stands to make Abel’s unit, which already operates in states including Iowa, Oregon and Utah, the largest U.S. utility owner by customer accounts.
Abel, 50, has helped guide MidAmerican and its predecessor companies through acquisitions in the U.K. and U.S. during the last two decades. Since taking over as chief executive officer in 2008, his company has also agreed to invest in renewable-energy projects and agreed to help fund natural-gas power plants in Canada.
“He has the confidence of Buffett and the board,” said David Rolfe, chief investment officer of Berkshire shareholder Wedgewood Partners Inc., which has about $4.2 billion under management. “He’s a great operator.”
Buffett, 82, relies on his deputies to make deals and invest in plant and equipment to build the operating businesses and widen their competitive advantage. That helps slow the accumulation of cash and reduces the need for Buffett, Berkshire’s chairman and CEO for more than four decades, to make stock picks and acquisitions.
MidAmerican, which is about 90 percent-owned by Omaha, Nebraska-based Berkshire, doesn’t pay a dividend to Buffett’s company. That freed up cash for Abel and his predecessor David Sokol to invest in utilities, pipelines and other businesses. Sokol left Berkshire in 2011.
MidAmerican had expressed interest to NV Energy in the past and indicated it would be open to a dialogue at the “right time,” Abel said in a phone interview yesterday. That helped spur the transaction that came together in the last few weeks with CEO Michael Yackira, he said.
“We’ve always believed that Michael and his team are a good management team,” Abel said. “We like the quality of the assets. We like the state of Nevada.”
Abel declined to speak about Buffett’s involvement in the deal or its financing. MidAmerican will have about $66 billion in assets after completion, expected in the first quarter of 2014, according to a statement yesterday.
Customer accounts would swell to 8.4 million with the acquisition, according to data compiled by Bloomberg. And the purchase will give Abel’s company operations in a state poised for a rebound. Residential construction permits rose 47 percent in the state last year last year after declining since 2005.
Nevada also presents opportunities for MidAmerican’s growing renewable-energy business. The company has signed deals in the last two years to buy solar projects in Arizona and California, expanded with wind farms in Iowa and, this month, announced a deal with TransAlta Corp. that will extend the life of some of its geothermal facilities.
“It’s a state that has an abundance of renewable resources,” Abel said. “We should be able to help facilitate the utilization of those.”
Buffett, the world’s third-richest person, has said that utilities have earning power even under adverse economic conditions and can provide fair returns on capital as long as they invest to meet customer needs.
“Abel is doing what Buffett wants him to keep doing,” said Jeff Matthews, a Berkshire investor and author of books about the company. “He wants to see this big, regulated entity deploy capital that it can earn a nice, fat, pretty-certain return on, so long as it keeps its nose clean with the regulators. And MidAmerican tends to keep its nose clean.”
Buffett didn’t respond to a request for comment sent to an assistant.
Abel said he hasn’t ruled out further acquisitions, though his team will focus for now on completing the NV Energy deal and investing in existing operations. In addition to cash it generates, MidAmerican has a $2 billion equity commitment from Berkshire, according to regulatory filings.
“If the right opportunity presents itself, we would pursue that,” he said. “That’s really the benefit of being part of the Berkshire family.”
Abel’s dealmaking and management ability make him among the top contenders to succeed Buffett as CEO, said Wedgewood’s Rolfe. The billionaire has said his responsibilities will be split among that role, a non-executive chairman and investment managers once he’s no longer leading the company.
As he prepares for the transition, Buffett has highlighted his managers’ ability to make acquisitions. Berkshire set a record for such “bolt-on” deals last year, buying 26 companies valued at about $2.3 billion, he said in a March letter to shareholders.
“Charlie and I love these acquisitions,” he wrote, referring to Berkshire Vice Chairman Charles Munger. “Usually they are low-risk, burden headquarters not at all, and expand the scope of our proven managers.”
Abel’s compensation was $12.8 million last year, including a salary of $1 million and a $9.5 million bonus. That compares with a package of $9.91 million in 2011.
Buffett has been trying to build Berkshire through larger acquisitions, such as the $26.5 billion purchase of railroad Burlington Northern Santa Fe in 2010. Earnings from the railroad and subsidiaries that provide insurance, manufacture chemicals and sell products from underwear to diamonds boosted the company’s cash hoard to $49.1 billion at the end of March.
Berkshire climbed 1.7 percent to a record close of $172,200 in New York, lifting the company’s market value to more than $280 billion. NV Energy surged to $23.62.
The fact that the deal announced yesterday is a bolt-on for Berkshire shows the scope of what Buffett has built, said Richard Cook, co-founder of Cook & Bynum Capital Management LLC.
“It’s amazing that it’s not a huge transaction for Berkshire anymore,” Cook, who oversees shares in Buffett’s company, said by phone. “That’s how big Berkshire has become.”
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