DALLAS (Reuters Breakingviews) - Warren Buffett’s folksy charm may come in especially handy for his Oncor encore. The Oracle of Omaha’s Berkshire Hathaway conglomerate is taking a second stab at the Texas electricity provider and its parent company, Energy Future, six years after a $2 billion investment led to hefty losses. Two other suitors previously failed to reach accord with regulators, however. Creditors, too, may require some sweet talk.
Back when it was known as TXU, the company became the apex of leveraged-buyout excess and Buffett got swept up in it. After KKR, TPG and a Goldman Sachs fund bought TXU for $44 billion, Berkshire Hathaway put money into the debt. Even before already-low natural-gas prices went lower and sent TXU spiraling into bankruptcy, Buffett told his shareholders he wished he’d never heard of Energy Future. Berkshire lost nearly $900 million, pre-tax, on the deal.
The utility, Oncor, became the coveted piece of the operation after Energy Future sought protection from creditors in 2014. Hunt Consolidated bid for it a year later and endured an arduous regulatory process, only to walk away after it couldn’t agree on a structure with the Lone Star State. NextEra Energy came around last year and encountered similar troubles, mainly because regulators wanted extra safeguards the Florida company was unwilling to implement.
In both proposals, cash payouts were a sticking point. In that way, Buffett’s deal is notably different. Berkshire Hathaway Energy doesn’t pay dividends, and explicitly boasts about reinvesting cash in the business. It also appears to be buying all of Energy Future for an enterprise value of about $18 billion rather than just the transmission group. This should provide a seamless way to exit bankruptcy without breaking it up. The Texas Public Utility Commission’s statement on Friday struck a positive tone.
Complications remain, though. For one, Berkshire Hathaway is paying $9 billion in cash while the equity value of Oncor alone is $11.3 billion, according to the company’s otherwise sparse press release. The process also requires approval from the bankruptcy court where creditors including pushy hedge fund Elliott Management have a say. And regulators could spend as long as six months running over the fine print.
With so many constituencies to appease and the history of collapsed offers for Oncor, Buffett will have to call on all his negotiating savvy and homespun wisdom to pull this one off.
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