Stock Picking Not Focus It Once Was -- 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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With its latest energy bid, Warren Buffett's Berkshire Hathaway Inc. is looking to extend its shift away from stock picking to power its growth.

Last week, the billionaire investor's firm offered to buy bankrupt power-transmission firm Energy Future Holdings Corp. for $9 billion in cash. Should the deal go through, Berkshire would be expanding its reliance on running stable and highly regulated industries to deliver growth.

Mr. Buffett rose to fame as a stock picker and continues to invest tens of billions in equities and other securities for Berkshire's portfolio.

But today, those investments are "de-emphasized," as Berkshire earns significantly more income from its operating businesses, Mr. Buffett said in his February letter to shareholders. Berkshire has undergone a "gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses," he wrote.

The conglomerate's shift toward regulated businesses began in 1999, when Berkshire announced an agreement to buy its first utility business, and accelerated with the 2009 agreement to acquire railroad Burlington Northern Santa Fe. Regulated businesses can yield steady returns, while stock investments are more volatile but can produce bigger wins. Berkshire also operates less-regulated businesses including retailers and manufacturers.

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The energy and railroad businesses accounted for 24% of Berkshire's 2016 net earnings, up from 8% a decade ago.

"The franchise has pivoted away from equity investments toward acquisitions," said James Shanahan, senior equity-research analyst at Edward Jones. "The bigger the utility business gets, I think the more important it becomes that the leader of Berkshire Hathaway has a strong understanding of the operations of utility businesses."

If Berkshire Hathaway Energy's deal to buy Energy Future Holdings and its Texas-based utility Oncor is approved, Oncor would increase the conglomerate's earnings by about 2%, according to Morgan Stanley analysts.

The deal has been challenged by hedge fund Elliott Management Corp., which said it plans to put together its own deal with a higher valuation for Oncor.

One major ramification of the Oncor deal, should it go through, is that it would give more power to Berkshire Hathaway Energy's chief executive, Greg Abel. Analysts say this purchase make them increasingly confident Mr. Abel is the leading candidate to succeed Mr. Buffett as chief executive of the parent company.

Mr. Abel, 55 years old, runs Berkshire Hathaway Energy similarly to how Mr. Buffett, 86, runs Berkshire. Both managers maintain small head offices -- 27 employees at Berkshire Hathaway Energy and 25 at Berkshire's headquarters -- and grant their subsidiary managers autonomy to run their businesses.

Before making its bid to buy Energy Future, Berkshire Hathaway Energy participated in talks with Texas regulators and major Oncor customers to make sure its bid would be acceptable to them, Oncor executives said in an interview. Regulators have scuttled two previous attempts to buy Energy Future's 80% stake in Oncor.

"They went to Texas first," said Bob Shapard, Oncor's chief executive. "Berkshire brought [Energy Future] a deal that essentially had been settled with the major players in Austin."

Berkshire Hathaway Energy, formerly known as MidAmerican Energy Holdings Co., has led some of Berkshire's biggest acquisitions. This deal would significantly expand its customer base. Dallas-based Oncor serves 10 million Texans, and Berkshire Hathaway Energy serves 11.6 million customers in Midwestern and Western states, the U.K. and Canada through its utility and natural-gas businesses.

Mr. Abel joined the company in 1992 and became chief executive in 2008. Berkshire Hathaway Energy declined to make Mr. Abel available to comment.

Ajit Jain, who oversees many of Berkshire's insurance operations, is also widely considered a potential successor to Mr. Buffett. Mr. Jain declined to comment. Berkshire has acquired insurers in recent years and launched a commercial-insurance company in 2013.

More broadly, Berkshire's utility investments mark a different strategy than how Mr. Buffett built his firm decades ago, when he sought to buy companies like See's Candies that required little capital investment.

As Berkshire has grown into a behemoth, Mr. Buffett has turned to acquiring regulated businesses that require consistent maintenance. The downside is these businesses require continuing capital investments, but that helps use up some of Berkshire's massive cash pile. The utility businesses also earn tax credits for their significant investments in renewable energy.

"It is probably a different act to maintain this company than it was to build it," said Lawrence Cunningham, a law professor at George Washington University who has written about Berkshire. "Warren wasn't doing this when Berkshire was much smaller, but nowadays, in the last 10 years, they've got so much capital."

Mr. Buffett didn't respond to a request for comment.

Mr. Buffett told shareholders at the company's annual meeting in May that the next CEO's main job would be capital allocation. Even if the Oncor deal closes, Berkshire has about $50 billion in cash available to spend, according to CFRA Research.

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

(END) Dow Jones Newswires

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