Pushback On Bid Tests Buffett's Resolve -- WSJ

By Nicole Friedman Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 12, 2017).

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Warren Buffett's Berkshire Hathaway Inc. is under pressure to do something it usually doesn't do: raise its bid.

Berkshire's subsidiary Berkshire Hathaway Energy struck a deal last week to buy bankrupt Energy Future Holdings Corp., including Texas electricity-transmission business Oncor, for $9 billion in cash.

Paul Singer's Elliott Management Corp., a major Energy Future creditor, said Berkshire's bid doesn't value Oncor highly enough and that it is working on a rival offer. "It is quite likely that the Berkshire transaction will not close, given the lack of support from the debtors' creditors," a lawyer for Elliott wrote in a Tuesday letter that was publicly released by the hedge fund.

For decades, Mr. Buffett has included in his company's annual report a list of criteria for companies that might want to sell businesses to Berkshire. Berkshire is looking for large companies with little debt, the list says -- and it isn't interested in bidding wars or hostile takeovers.

"We don't participate in auctions," Mr. Buffett wrote in the latest annual report. "A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: 'When the phone don't ring, you'll know it's me.'"

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If the Oncor deal doesn't go through, Energy Future would pay Berkshire Hathaway Energy a $270 million fee, according to a filing. The fee would have to be approved by the bankruptcy court.

The potential Berkshire deal would need permission from a bankruptcy court and from Texas regulators. Regulators already have indicated they would support Berkshire as a buyer.

Berkshire Hathaway Energy declined to comment.

Berkshire watchers said the company is unlikely to raise its initial bid. "His trump card is his willingness to walk away," said David Rolfe, chief investment officer at Wedgewood Partners, which manages about $6 billion and holds Berkshire shares, referring to Mr. Buffett. "He does not have a history of bidding-type competitions, and he typically has played a pretty strong hand."

Mr. Buffett has long been known for quickly negotiating deals and sticking with his initial price offer.

"His playbook is not to negotiate," said Robert Miles, who has written books on Berkshire. "Buffett would take the $270 million and move on to the next deal, which is what they did with Constellation."

Berkshire's energy unit reached a deal in 2008 to buy Constellation Energy Group Inc. but withdrew the offer after state-controlled Electricité de France SA agreed to buy a stake in Constellation. Berkshire received a $175 million breakup fee.

To be sure, many potential Berkshire deals that fall through never become public. In 2012, Mr. Buffett told shareholders that Berkshire almost spent $22 billion buying a company but couldn't reach an agreement. He didn't name the potential target.

A recent withdrawal occurred earlier this year when Kraft Heinz Co., which is partly owned by Berkshire and Brazilian private-equity firm 3G Capital, backed away from a $143 billion approach to take over Unilever PLC in February after Unilever declined. Mr. Buffett revealed at his company's May annual meeting that Berkshire would have invested $15 billion if the deal were reached.

"If it's unwelcome, there is no offer," Mr. Buffett told CNBC in February.

Mr. Buffett famously participated in one hostile deal decades ago -- the takeover of Berkshire itself. Mr. Buffett bought shares in Berkshire, which was a New England textile company, starting in 1962. In 1965, he appeared at a board meeting to take control of the company formally and replace the management.

In retrospect, he has said, the deal was a mistake. "I found myself...invested in a terrible business about which I knew very little, " he wrote in 2014.

Mr. Buffett did raise the offer price in 1999 when he bought a majority stake in MidAmerican Energy Holdings Co., now called Berkshire Hathaway Energy. But he made the switch before the deal was announced, as he explained in his 2007 letter to shareholders.

Mr. Buffett originally offered $35 a share for MidAmerican, but after pressure from investment bankers, he raised it to $35.05, he said in the letter. "With that, I explained, they could tell their client they had wrung the last nickel out of me," he wrote. "At the time, it hurt."

But given MidAmerican's growth since then, he said in the same letter, "I'm glad I wilted and offered the extra nickel."

Write to Nicole Friedman at nicole.friedman@wsj.com

(END) Dow Jones Newswires

July 12, 2017 02:47 ET (06:47 GMT)