“I hate cash. I mean we are investing. But [cash] is a holding position until you find something else. But the very fact that interest rates are that low makes it hard for us to buy other things because other people buy things with borrowed money, and borrowed money is so cheap.”
– Warren Buffett in a CNBC interview, May 2017
Warren Buffett has been lamenting equity valuations for some time now. This has prevented him from finding any compelling buying opportunities for his Berkshire Hathaway (BRK-A) (BRK-B) investment portfolio.
In the same interview quoted above, Buffett said that Berkshire is always looking to ‘buy a big business’. It appears that that opportunity has finally arrived.
On Friday, Berkshire announced a $9 billion cash offer to acquire Oncor, a Texas-based electric utility currently navigating through prolonged bankruptcy proceedings.
This is welcome news for Berkshire Hathaway investors. Berkshire Hathaway’s cash account has ballooned to ~$80 billion over the past several years, a substantial sum that is earning little return in today’s low interest rate environment.
Because of Berkshire’s cash position, the Oncor acquisition comes at an opportune time. This article will analyze the rationale behind Berkshire Hathaway’s acquisition of Oncor in detail.
The Setting
Buffett is known for buying companies when they are experiencing some sort of temporary distress.
This Oncor purchase is no different.
Oncor’s parent company – Energy Future Holdings – is working through bankruptcy proceedings that have lasted for three years.
Energy Future Holdings was created in 2007 in a $45 billion leveraged buyout – the largest ever at the time. The formation of Energy Future Holdings and the entity’s later success was highly dependent on natural gas prices.
During the financial crisis, natural gas prices plunged and failed to meaningfully recover (partially due to the introduction of fracking).
The price of natural gas since Energy Future Holdings’ inception can be seen below.
Source: U.S. Energy Information Administration
Now that the company is bankrupt, Buffett is swooping in to buy the company’s distressed assets and energy distribution network on the cheap.
“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
Buffett’s bid came after two other suitors, Hunt Consolidated and NextEra Energy, already presented bids but were declined approval from the Texas Public Utility Commission.
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