Rival Bid for Oncor Brews -- WSJ

The $9 billion deal might spark a richer bid from bondholder Elliott Management

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 8, 2017).

Hedge fund Elliott Management Corp., dissatisfied with Berkshire Hathaway Inc.'s $9 billion deal to buy electricity-transmission business Oncor, is considering making a competing bid, according to people familiar with the matter.

Elliott is the biggest bondholder of bankrupt Energy Future Holdings Corp., which owns an 80% stake in Oncor and agreed to sell itself to Warren Buffett's Berkshire on Friday. Court papers indicate that Elliott, a $33 billion hedge fund run by billionaire Paul Singer, is in position potentially to bottle up Berkshire's deal in bankruptcy court or put together a better offer.

The hedge fund ran up a big stake in Energy Future's debt in recent months, as others funds retreated in the face of failed efforts to sell Oncor, but it isn't known what Elliott paid for the debt holdings. Trading in Energy Future bonds was mixed Friday in an early reaction to the Berkshire offer. The price of a level of junior debt dubbed the "PIKs," or pay-in-kind notes, fell, while a senior tranche of bonds -- the so-called second liens -- rose. Elliott is a big holder of both types of debt.

Berkshire's deal is for $9 billion in cash in exchange for Energy Future, including its stake in Oncor, the largest electric utility in Texas and one of the biggest power-transmission systems in the county.

That is less than Energy Future needs to pay off creditors and end the massive bankruptcy that is now in its fourth year. The company has already seen the collapse of two previous efforts to sell the Oncor transmissions business, its crown jewel.

Reuters first reported Elliott was considering a bid for Oncor.

Unless the Berkshire offer is improved or bested, Elliott could be looking at significant losses, according to other people familiar with the matter. An analysis issued Friday from Cowen Credit Research and Trading suggests that may not be the case, however, and that the hedge fund could offset losses in one class of debt with gains in another.

A successful offer by Elliott would be a tall task: It has never done a deal of the size and scope of the Oncor buyout, and it would need allies. It also faces regulatory risks that Berkshire is unlikely to encounter. And it would have to outbid Mr. Buffett, a prolific investor with $96.5 billion in cash on Berkshire's balance sheet to spend.

Still, as the largest creditor in Energy Future's case, Elliott has considerable leverage. The hedge fund owns a "blocking" position in the two major debt classes, the second-lien notes and the PIKs, making it the swing vote on a chapter 11 reorganization plan for Energy Future that would be part of the Berkshire takeover.

Energy Future could try to force Elliott to go along with the Berkshire deal, through what is known as a "cram-down" fight in bankruptcy court. A cram-down battle against Elliott would be tough to win, however, if Elliott musters the backers to top Berkshire's offer for Oncor.

Elliott's bankruptcy court prowess, however, won't matter if a deal it puts together is scuttled by the Public Utility Commission of Texas. The state PUC has proven a formidable testing ground for Oncor suitors.

Berkshire, in contrast, has already won over key Texas regulatory stakeholders.

On Friday, Brian Lloyd, executive director of the Texas PUC, said Berkshire had already sketched out a preliminary case for a takeover, and the commission staff and powerful groups of cities and big industrial energy consumers liked what they saw. The commissioners themselves haven't yet weighed in, but Mr. Lloyd's statement was a strong signal that influential stakeholders that opposed earlier deals are happy with Berkshire.

Oncor, a solid company with reliable cash flow, has been difficult to sell because Texas regulators have insisted on protections that kept Oncor out of Energy Future's chapter 11 case and blocked deals that would expose a crucial piece of the Texas electricity infrastructure to risk.

After Texas regulators swatted down Oncor takeover proposals from Hunt Consolidated Inc. of Texas and from NextEra Energy Inc. of Florida, creditors knew the next deal wouldn't be as rich. A number of distressed-debt investors say the rough math indicates Berkshire's money would fall short of what it takes to cover Energy Future's remaining debts.

A $6.1 billion bankruptcy loan would be paid in full, Berkshire said Friday in a regulatory filing.

But there is still $4 billion or more in debt to pay off, including high-priority liabilities such as fees for the army of lawyers, bankers and financial advisers shepherding Energy Future through bankruptcy. The company's chapter 11 proceeding, which began in April 2014, could run into 2018.

Write to Peg Brickley at peg.brickley@wsj.com and Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

July 08, 2017 02:47 ET (06:47 GMT)