Stars Align For Warren Buffett
Wall Street might be disappearing into a black hole, but the stars are aligning for Warren Buffett.
The veteran value investor has swooped in on Constellation Energy Group, the natural-gas and power company that lost more than half its value this week. MidAmerican Energy Holdings, part of Berkshire Hathaway, has thrown Constellation a lifeline in the form of a tentative $26.50-a-share takeover offer.
Constellation, which started the year with its stock price over $100, is the sort of victim Mr. Buffett loves.
Alarm bells rang last month when Constellation admitted it had miscalculated its collateral requirements in the event its credit ratings were cut to 'junk' levels. Constellation was still trying to address the knock to confidence about its internal controls and liquidity when the credit storm reached hurricane force this week.
It had $2 billion of liquidity on hand. But Standard & Poor's was threatening a potential downgrade that would have left Constellation needing to post another $3.3 billion of collateral for its energy-trading operations. Time to bring in a well-capitalized buyer.
MidAmerican is paying $4.7 billion for the common equity, taking a $1 billion preferred interest and assuming $4.8 billion of net debt. For that, it gets nearly 9,000 megawatts of electricity plants, 1.7 million customers, natural-gas reserves and the energy-trading book.
The cost to unwind that book is anyone's guess. Dan Eggers, an analyst at Credit Suisse, posits a preliminary figure of $2 billion. Even then, Mr. Buffett is getting Constellation at a phenomenally good price.
Property, plant and equipment were valued at a net $10.4 billion at the end of June. Replacement cost would be much higher and almost half the generation fleet consists of very desirable, low-emissions nuclear and hydroelectric plants.
Credit Suisse forecasts the two biggest 'hard' assets, the generation and utility businesses, to generate combined earnings before interest, tax, depreciation and amortization of $2 billion in 2009. Put a conservative multiple of six times on that and they are valued at $12 billion.
Indeed, the one potential drawback of such a sweet deal is that it tempts in rival bidders.
More broadly, investors hope this move from Mr. Buffett, with a war chest put at $35 billion back in May, signals a market bottom.
Don't count on it. Constellation, long on hard assets but short on liquidity, represents a perfect opportunity. Bombed-out bank valuations, on the other hand, look less tempting, given the root cause of their problems: opaque, potentially toxic balance sheets.
With the ripples emanating from Wall Street potentially set to claim more victims in the weeks and months ahead, further industrial opportunities may well present themselves. But not every sector can bank on a 'Buffett put.'
Liam Denning
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