By Peg Brickley and Nicole Friedman
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.
Mr. Singer's Elliott Management Corp. is putting together a
competitive deal, one that values Oncor at $18.5 billion, 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 by 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 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 Co.,
through spokespeople, 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's 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 "ring-fencing"
provisions demanded by Texas regulators. The ring-fence safeguards
Oncor's cash flow and keeps the company in the hands of independent
directors.
Both Berkshire and Elliott say they will heed the ring-fencing
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
(END) Dow Jones Newswires
July 10, 2017 16:10 ET (20:10 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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