Buffett Power Hunt May Target Wisconsin Energy: Real M&ATara Lachapelle and Mark Chediak
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.
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.
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.”
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.
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.”
Today, Wisconsin Energy shares gained 1.8 percent to $44.22, the highest since May. Alliant rose 1.5 percent to a record $54.29 and Westar climbed 1.1 percent to $34.49.
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?”
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.
Today, Plains shares fell 1 cent to $54.36, and MarkWest climbed 1.7 percent to $65.27.
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.
“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.