Berkshire unit agrees to buy NV Energy
GREG Abel, who helped build Berkshire Hathaway’s utility business, MidAmerican Energy Holdings, is showing that he has earned the trust of his boss, Warren Buffett, after striking a $5.6bn deal for NV Energy.
MidAmerican said that it would buy Las Vegas-based NV Energy for $23.75 a share in cash, or about 23% more than Wednesday’s closing price, to expand in Nevada. The transaction stands to make Mr Abel’s unit, which already operates in states including Iowa, Oregon and Utah, the largest US utility owner by customer accounts.
Mr Abel has helped guide MidAmerican and its predecessor companies through acquisitions in the UK and US during the past two decades. Since taking over as CEO in 2008, his firm has also agreed to invest in renewableenergy projects and agreed to help fund natural-gas power plants in Canada.
“He has the confidence of Mr Buffett and the board,” said David Rolfe, chief investment officer of Berkshire shareholder Wedgewood Partners, which has about $4.2bn under management. “He’s a great operator.”
Mr Buffett 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 Mr Buffett, Berkshire’s chairman and CEO for more than four decades, to make stock picks and acquisitions.
MidAmerican, which is about 90%-owned by Omaha, Nebraskabased Berkshire, does not pay a dividend to Mr Buffett’s company. That freed up cash for Mr Abel and his predecessor David Sokol to invest in utilities, pipelines and other businesses. Mr 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”, Mr Abel said on Wednesday.
That helped spur the transaction that came together in the past few weeks with CEO Michael Yackira, he said.
“We’ve always believed that Michael and his team are a good management team,” Mr Abel said. “We like the quality of the assets. We like the state of Nevada.”
He declined to speak about Mr Buffett’s involvement in the deal or its financing. MidAmerican will have about $66bn in assets after completion, expected in the first quarter of next year.
Customer accounts would swell to 8.4-million with the acquisition, according to data. The purchase will give Mr Abel’s firm operations in a state poised for a rebound. Residential construction permits rose 47% in the state last year after declining since 2005.
Mr Buffett, the world’s thirdrichest 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.
“Mr Abel is doing what Mr 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.”
Mr Abel’s deal-making and management ability make him among the top contenders to succeed Mr Buffett as CEO, said Mr Rolfe. The billionaire has said his responsibilities will be split among that role, a nonexecutive chairman and investment managers once he is no longer leading the company.
As he prepares for the transition, Mr 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 $2.3bn, 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.”
Mr Abel’s compensation was $12.8m last year, including a salary of $1m and a $9.5m bonus. That compares with a package of $9.91m in 2011.
Mr Buffett has been trying to build Berkshire through larger acquisitions, such as the $26.5bn purchase of the Burlington Northern Santa Fe railway in 2010.
Earnings from the railway and subsidiaries that provide insurance, manufacture chemicals and sell products from underwear to diamonds boosted the company’s cash hoard to $49.1bn at the end of March and its market value to almost $280bn yesterday.
That the $5.6bn NV Energy deal is a bolt-on for Berkshire shows the scope of what Mr Buffett has built, said Richard Cook, co-founder of Cook and Bynum Capital Management. “It’s amazing that it’s not a huge transaction for Berkshire anymore,” said Mr Cook. “That’s how big Berkshire has become.” Bloomberg