Elliott Is Set to Duel Berkshire in Battle For Utility Oncor -- WSJ

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 11, 2017).

Paul Singer's hedge fund is still pursuing Oncor, one of the largest power transmission utilities in the U.S., with a deal that it says is better than a buyout by Warren Buffett's Berkshire Hathaway Inc.

Berkshire's all-cash, $9 billion proposal for 80% of Oncor is the latest in a series of deals for Oncor, a thriving Texas system untouched by the financial woes that put its majority owner, Energy Future Holdings Corp., in bankruptcy. That deal has an enterprise value of about $18 billion, according to a person familiar with the matter and a report by Cowen & Co.

Mr. Singer's Elliott Management Corp. is putting together a competitive deal, one that values Oncor at $18.5 billion on an enterprise basis, an improvement over Mr. Buffett's offer, the hedge fund says.

Elliott, a $33 billion investment company, was putting its transaction together when it got wind that Berkshire was preparing to sign an offer at a value that "does not provide such value," according to a letter Elliott sent to Energy Future's board before Berkshire signed the deal.

Elliott unveiled weeks of back-and-forth negotiations with Energy Future as yet another battle brews over Oncor, a key piece of the Texas infrastructure that has been sought by a succession of suitors.

Oncor executives said in an interview that they have little knowledge of Elliott's plan.

Oncor led talks in Austin with state regulators and large customers for several weeks ahead of Berkshire's bid, said Allen Nye, senior vice president at Oncor.

The parties hammered out a list of conditions on which Berkshire and the regulators could agree.

Elliott attended one of those meetings but didn't provide enough details of its plan to reach an agreement with the regulators, Mr. Nye said. Mr. Nye would become Oncor's chief executive if the Berkshire transaction closes.

"Elliott has indicated they're pursuing a concept, but it's no more than a concept to us at this point," said Bob Shapard, Oncor's chief executive. "There's not a definite proposal that we can take to Austin and try to make a deal off, yet."

Mr. Buffett is known for making acquisitions quickly and avoiding auctions or deals that look too troublesome. If the deal went through, Oncor would be overseen by Greg Abel, chief executive of Berkshire Hathaway Energy Co. and a potential successor to Mr. Buffett.

Mr. Singer's hedge fund, which is famous for its lucrative, 15-year fight to get Argentina to pay up on its defaulted bonds, is known for wading into trouble. Elliott purchased Energy Future's debt in recent months while other investors retreated.

"If Buffett breaks his habit of avoiding bidding wars, his cost is not that he pays just a little more for Oncor, his cost is that he encourages Singer-like countermoves in every bid he makes from now on," said Erik Gordon, an assistant professor at the University of Michigan's Ross School of Business.

"If Buffett stands pat, Singer may get the company, and that may be more than [Singer] really wants."

Elliott was already out in the market looking for backers for its deal before Berkshire's offer was announced. Some Energy Future creditors said they hope the Berkshire offer was a "lowball" price designed to be improved under pressure.

In a court filing Friday, Energy Future cited "significant open issues" with Elliott's proposal, which had been in the works since June, in explaining why it decided to take the Berkshire offer.

Because of its long-running bankruptcy, Energy Future needs a court's permission to sign the deal with Berkshire. It hopes for an Aug. 10 hearing. Oncor is all that is left of Energy Future. The rest of the company exited bankruptcy last year, and now it is simply a holding company for the 80% Oncor stake.

In a July 5 letter to Energy Future's board, Elliott said it wanted to sit down with Berkshire for talks, to avoid unnecessary delays and expenses.

On Monday, Energy Future and Berkshire Hathaway Energy, through representatives, declined to discuss Elliott's proposal or the possibility of creditor talks.

As a major Energy Future creditor, Elliott is in position to swap some debt for equity, reducing the amount of cash it needs to counter the Berkshire offer. It also plans to tap its own funds and draw in other investors to pay down some of Energy Future's $11 billion debt load, according to deal documents Elliott unveiled.

A reorganized Energy Future, with only $4 billion in debt, would emerge from bankruptcy, still owning 80% of Oncor, under Elliott's proposal.

And while owning Oncor might not have been what Elliott set out to do, the transmissions business is not distressed. It is a cash cow for owners, one that paid out $2.7 billion in dividends in the years since its majority owner, Energy Future, was saddled with debt in a 2007 leveraged buyout.

Oncor stayed out of the bankruptcy thanks to "ringfencing" provisions demanded by Texas regulators. The ringfence safeguards Oncor's cash flow and keeps the company in the hands of independent directors.

Both Berkshire and Elliott say they will heed the ringfencing provisions.

Berkshire already has made friends among big Texas energy consumers, industrial and municipal. It likely won't face opposition when its deal comes up for review before the Public Utility Commission of Texas, according to a statement issued last week by Brian Lloyd, executive director of the Public Utility Commission of Texas.

Before it gets to the PUC, however, the Berkshire deal has to make it through bankruptcy court, where Elliott holds a commanding position as Energy Future's largest single creditor, owning 74% of a crucial class of debt.

Earlier Oncor takeover attempts failed at the regulatory hurdle, including the most recent, a buyout by NextEra Energy Inc.

The failed NextEra deal may return to haunt Energy Future creditors.

On Monday, NextEra in a filing with the Securities and Exchange Commission, signaled that it will, as expected, press Energy Future for payment of a $275 million termination fee.

Those funds would come out of the pockets of Energy Future creditors, chiefly Elliott. The hedge fund has made it clear it will battle NextEra over the termination fee.

Write to Peg Brickley at peg.brickley@wsj.com and Nicole Friedman at nicole.friedman@wsj.com

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July 11, 2017 02:47 ET (06:47 GMT)