BRK: Oncor Acquisition

[Valuehalla]

Acquisition is done:

 

https://www.wsj.com/articles/warren-buffetts-berkshire-nears-a-deal-to-buy-oncor-1499363036

 

Here is the press release of BRK:

 

http://www.berkshirehathawayenergyco.com/news/oncor-to-join-berkshire-hathaway-energy

 

[ScottHall]

Seems like a smart buy.

[John Hjorth]

News release of today from BHE, that the deal has closed, subject to the usual approvals. [Also posted in the general news topic by globalfinancepartners.]

[Valuehalla]

It looks great.

 

Oncor will provide app. 1,8 B EBITDA and app. 1,6 B CF.

 

http://www.oncor.com/EN/Documents/Investors/Q1%202017%20Earnings%20Call%20Deck%20-%20Final%20-%205.08.17.pdf

 

On the invested cash of 9b thats app 20%, on the 11,25 B thats 15 %.

Further there will be a bulk of operative and financial synergies, which will be realized in the future.

So very well done.

 

If we add app. 1,7 B to 24,1 B full year earnings of BRK thats 25,8 B so 7,5 % more.

 

Mr Market shall deliver us 7,5 % more marketcap....please !  8)

 

[giofranchi]

Seems like a smart buy.

 

+1

 

Once agian high general market valuations and political/macro uncertainties are not allowed to get in Berkshire's way when a smart buy becomes available.

 

Cheers,

 

Gio

[John Hjorth]

Valuehalla,

 

Aren't you confusing EBITA with EBITDA in your last post? I see a net income 2017Q1 of USD 73 M on page 5.

[Guest longinvestor]

A repeating theme underlying Berkshire purchases is that the investee was laid out to ruins by leveraged buyouts, causing the business to drown in debt. They call it by different names, like private equity etc. but it is always the same. Thankfully, Oncor provides an essential service and regulators want Berkshire to be the buyer. Longevity over all else, including price consideration, shall we say? How about the term tailor made?

 

So, May the vulture financiers continue to be sinful & greedy, all the Omaha boyz have to do is sit back and wait. All it takes is about 5-7 years, the typical time frame for the exit strategy for the LBO types.

[Guest longinvestor]

Valuehalla,

 

Aren't you confusing EBITA with EBITDA in your last post? I see a net income 2017Q1 of USD 73 M on page 5.

 

Are there any NOL's or similar offsets in play here?

[John Hjorth]

Attached are the 2016 Oncor financials.

 

Just a few observations after a first glance:

 

Cash flow from operations 2016: USD 1.429 B [for the whole Oncor].

Goodwill in balance sheet: USD 4.064 B [for the whole Oncor].

Membership interest [equity]: USD 7.710 B [for the whole Oncor].

Cash outlay, ref. news release:  USD 9.000 B [for 80 per cent of Oncor].

Implying goodwill for BHE before purchase accounting adjustments under past equity consolidation method : [uSD 4.064 B + USD 9.000 B - [0.8 x USD 7.710 B]] = USD 6.896 B.

[All based on if the transaction took place 1st January 2017.]

 

- - - o 0 o - - -

 

Please also note the debt [notes] in note 7 at USD 5.510 B. Just the refinancing of this debt going forward for Oncor under Berkshire & BHE umbrella will generate several millions in interest savings every year, the clip of the refinancing steps naturally depending on the terms for early redemption of the existing notes.

 

Edit:

 

To me, this already looks better than a pile of T-bills worth USD 9 B for Berkshire.

Oncor_Financials_2016.PDF

[John Hjorth]

Valuehalla,

 

Aren't you confusing EBITA with EBITDA in your last post? I see a net income 2017Q1 of USD 73 M on page 5.

 

Are there any NOL's or similar offsets in play here?

 

I don't see any information about NOLs in the notes or balance sheet, longinvestor.

 

There is USD 2.788 B "utility float" [deferred taxes] in the balance sheet, not bad at all.

 

The tax situation for Oncor is hairy, based on what mess Oncor is part of right now, ref. the content of note 12. Berkshire has really been fishing in white waters here.

[marazul]

Someone here knows how rate regulation works in a case like Oncor, allowed returns, methodology, etc?

[gfp]

It's also important to remember that Berkshire only has a deal for 80% of Oncor at this time.  Next-Era's deal was quoted in enterprise value terms and they had also made a deal to buy the other 20% from OMERS and other partners.

 

One would expect that Berkshire will try to also make a deal for the minority interest with OMERS and the other partners, but they might not be able to make the deal at the same valuation.

[DeepSouth]

A repeating theme underlying Berkshire purchases is that the investee was laid out to ruins by leveraged buyouts, causing the business to drown in debt. They call it by different names, like private equity etc. but it is always the same. Thankfully, Oncor provides an essential service and regulators want Berkshire to be the buyer. Longevity over all else, including price consideration, shall we say? How about the term tailor made?

 

So, May the vulture financiers continue to be sinful & greedy, all the Omaha boyz have to do is sit back and wait. All it takes is about 5-7 years, the typical time frame for the exit strategy for the LBO types.

 

Um, BRK invested in the TXU LBO bonds and lost $900mm.

[John Hjorth]

It's also important to remember that Berkshire only has a deal for 80% of Oncor at this time.  Next-Era's deal was quoted in enterprise value terms and they had also made a deal to buy the other 20% from OMERS and other partners. ...

 

Thank you, globalfinancepartners,

 

I have now adjusted the calculations in my post earlier today accordingly.

[rogermunibond]

A repeating theme underlying Berkshire purchases is that the investee was laid out to ruins by leveraged buyouts, causing the business to drown in debt. They call it by different names, like private equity etc. but it is always the same. Thankfully, Oncor provides an essential service and regulators want Berkshire to be the buyer. Longevity over all else, including price consideration, shall we say? How about the term tailor made?

 

So, May the vulture financiers continue to be sinful & greedy, all the Omaha boyz have to do is sit back and wait. All it takes is about 5-7 years, the typical time frame for the exit strategy for the LBO types.

 

Um, BRK invested in the TXU LBO bonds and lost $900mm.

 

And Buffett didn't include the opportunity cost of deploying that $2B into safer investment or even a risky investment that didn't blow up.  He counts the dividends received against the price paid.

[gfp]

The funny thing about the initial investment in the leveraged buyout bonds (the $2B face value) was that before they blew up, David Sokol was somewhere in an interview claiming that he brought that 'deal' to Buffett and taking 'credit' for it.  Buffett of course takes full responsibility for "totally misreading the probabilities of loss" (his words) - as he should.  But it sort of gentlemanly on Warren's part to never mention it was a Sokol deal / lead / whatever you want to call it...

[Guest longinvestor]

The funny thing about the initial investment in the leveraged buyout bonds (the $2B face value) was that before they blew up, David Sokol was somewhere in an interview claiming that he brought that 'deal' to Buffett and taking 'credit' for it.  Buffett of course takes full responsibility for "totally misreading the probabilities of loss" (his words) - as he should.  But it sort of gentlemanly on Warren's part to never mention it was a Sokol deal / lead / whatever you want to call it...

 

While we are on the subject, Sokol apparently used the services of an investment bank(think it was BofA) to find and close the deal on Lubrizol. It was a surprise for Buffett and he apparently found out when the bank chief wrote him thanking for the opportunity. It's in Cunningham's book.

[Guest longinvestor]

A repeating theme underlying Berkshire purchases is that the investee was laid out to ruins by leveraged buyouts, causing the business to drown in debt. They call it by different names, like private equity etc. but it is always the same. Thankfully, Oncor provides an essential service and regulators want Berkshire to be the buyer. Longevity over all else, including price consideration, shall we say? How about the term tailor made?

 

So, May the vulture financiers continue to be sinful & greedy, all the Omaha boyz have to do is sit back and wait. All it takes is about 5-7 years, the typical time frame for the exit strategy for the LBO types.

 

Um, BRK invested in the TXU LBO bonds and lost $900mm.

 

And Buffett didn't include the opportunity cost of deploying that $2B into safer investment or even a risky investment that didn't blow up.  He counts the dividends received against the price paid.

 

Hmm. they will recover the 900m and opportunity cost. And some.  Not written off yet. This is one way to recover losses.

[John Hjorth]

A repeating theme underlying Berkshire purchases is that the investee was laid out to ruins by leveraged buyouts, causing the business to drown in debt. They call it by different names, like private equity etc. but it is always the same. Thankfully, Oncor provides an essential service and regulators want Berkshire to be the buyer. Longevity over all else, including price consideration, shall we say? How about the term tailor made?

 

So, May the vulture financiers continue to be sinful & greedy, all the Omaha boyz have to do is sit back and wait. All it takes is about 5-7 years, the typical time frame for the exit strategy for the LBO types.

 

Um, BRK invested in the TXU LBO bonds and lost $900mm.

 

And Buffett didn't include the opportunity cost of deploying that $2B into safer investment or even a risky investment that didn't blow up.  He counts the dividends received against the price paid.

 

Hmm. they will recover the 900m and opportunity cost. And some.  Not written off yet. This is one way to recover losses.

 

Didn't Mr. Buffett dump the bonds at a loss, thereby calling it a day with this mistake? [sorry, I'm getting lazy here - I'm actually sitting under the parasol with the Lady of the House right now with a glass of wine rosé, and it's Friday evening here right now.]

[rb]

Someone here knows how rate regulation works in a case like Oncor, allowed returns, methodology, etc?

Don't know the particulars for Oncor in Texas, but for transmission assets in the US they're generally allowed 12% ROE on a capital structure that's about 1/3 equity, 2/3 debt.

[gfp]

What is Paul Singer thinking?  If NextEra can't get Texas regulatory approval, there is no way his hedge fund can put together a higher bid that actually closes...  Texas wants BRK to own it.

 

http://www.cnbc.com/2017/07/07/buffett-may-reportedly-have-some-competition-for-latest-deal-from-singer.html

 

edit - texas regulators and major 'stakeholders' already informally blessing the berkshire deal.  good luck getting anyone else past the PUCT -

https://www.wsj.com/articles/warren-buffett-and-oncor-let-the-battle-of-the-billionaires-begin-1499469066

[gfp]

These are the official merger docs by the way:

https://www.sec.gov/Archives/edgar/data/1081316/000119312517224109/0001193125-17-224109-index.htm

 

Sounds like there are 'drag along rights' that will compel the 20% minority holders to sell to BRK Energy as well.

 

on a side note, I wonder if Walter Scott and the other minority owners of BRK Energy (90% owned by Berkshire) will be contributing their share of cash for this deal or if a.) Berkshire ends up owning more than the current 90% - or - b.) BRK Energy doesn't need to raise very much cash for this deal because of access to attractive credit.

 

edit: sounds from the merger agreement like Berkshire Hathaway Energy intends to issue 4.5% preferred stock to finance part of the deal, 20 years fixed rate, floating thereafter.  Wonder if BRK will take up that offering or if it will be publicly traded.  Sounded like they intended to register it, which sounds like a public offering.

[John Hjorth]

Thank you for the last two posts of yours, globalfinancepartners, - they are very good,

 

I have just read the major parts of the merger docs this morning. I'm just so impressed, that it gave me goose bumps. Simply put, to me, it's a slam dunk.

 

This deal solves the whole situation with EFH Corp. being in bankruptcy since April 2014 and at the same time moving Oncor into safe harbour, backed by the regulatory bodies.

 

EFH Corp.'s owners have now had more than 3 years to solve the matter - which mean: They can't.

 

There is a cat flap for EFH Corp. to get out of the deal in the merger docs [termination fee of USD 270 M]. So where does a company under bankruptcy proceedings find a saving angel with access to at least USD 9.27 B that at the same time can get consent from the regulatory bodies, who have already expressed an positive opinion to Berkshire? - To me that is highly unlikely.

 

Edit:

 

With regard to the EFH bonds owned by Berkshire:

 

2011 shareholder letter, p.4 : The bonds were bought for about USD 2 B "a few years back", relative to February 2012, written down by USD 1 B in 2010 and further written down by USD 390 M in 2011.

[Valuehalla]

The marketreaction on Friday was disapointing ...

[John Hjorth]

Reuters : Elliott says considering a USD 18.5 B deal for Oncor.

 

This will be interesting to follow going forward.