The terms of the deal seem fair for both shareholders in NV Energy, as well as for investors in Berkshire Hathaway, which buys a nice addition for its energy business at a fair price. Medium sized deals like this offer a great opportunity for Berkshire to convert its low-yielding cash balances into higher yielding, but still stable cash flows.
NV Energy announced that it has reached a definitive acquisition agreement under which it will be sold to MidAmerican Energy.
MidAmerican will acquire NV Energy for $23.75 per share in cash, valuing the equity of the firm at $5.6 billion. Including the assumption of debt, the deal has a total enterprise value of around $10 billion.
NV Energy has some 1.3 million electric and natural gas consumers in Nevada. With the acquisition, NV Energy has the opportunity to benefit from MidAmerican's resources and expertise in renewable energy. In the long term, the company could become a leading provider of renewable energy in the state.
As a result of the deal, MidAmerican will boost its assets toward $66 billion, serving 8.4 million customers.
NV Energy generated full year revenues of $2.98 billion for 2012, up 1.2% on the year before. Net earnings roughly doubled to $322.0 million. The company ended its most recent quarter with $251 million in cash and equivalents and $5.0 billion in total debt.
The equity portion of the deal values NV Energy at 1.9 times annual revenues and 17-18 times annual earnings.
The deal is subject to normal closing conditions including shareholder, state and federal approval. The deal is expected to close in the first quarter of 2014. If the deal would break up for any reason, MidAmerican stands to receive a break-up fee of $170 million from NV Energy.
Upon completion of the deal, NV Energy will become part of MidAmerican Energy, which in its turn is part of Berkshire Hathaway, the holding company led by Warren Buffett.
Berkshire Hathaway ended its latest quarter with $49.1 billion in cash and equivalents. The holding company operates with $63.2 billion in total debt, for a relative modest net debt position of around $14 billion. Obviously financing of such a deal will pose no problems for Berkshire.
Berkshire generated annual revenues of $162.5 billion over the past year, up 13.1% on the year. Net income advanced by 44.6% to $14.8 billion. Obviously, the addition of NV Energy is just a drop in the bucket for a company the size of Berkshire.
Shares of Berkshire advanced by 1.5% on Thursday, valuing the conglomerate at $283.5 billion. This values the firm's operations at 1.75 times annual revenues and 19 times annual earnings.
It is well known that Berkshire does not pay a dividend, given Buffett's aversion to dividends, knowing he can create more value keeping the cash within the company.
Some Historical Perspective
Shares of Berkshire are inching up, trading at fresh all time highs at a share price of $172k. Shares peaked at $150k in 2007 to lose roughly half their value during the financial crisis. From there onwards, shares have seen a steady but impressive recovery. The conglomerate has been stepping up its acquisition pace in recent years, taking advantage of depressed prices.
Between 2009 and 2012, revenues rose by 45% to $162.5 billion, while earnings advanced by 85% to $14.8 billion in the meantime.
Buffett continues to put his money where his mouth is. Berkshire has made large acquisitions in recent years including the $34 billion deal to acquire Burlington Northern and this year's $23 billion deal to acquire H.J. Heinz.
It made medium sized acquisitions as well including 2011's purchase of Lubrizol for $9 billion and the latest deal with NV Energy.
This latest deal makes perfect sense for Buffett. Berkshire can transfer some of its massive cash balances from low yielding securities into a company, which earns a nice 5.5% yield based on last year's earnings.
NV Energy's debt could be refinanced at lower rates as well, most likely. The company is furthermore well positioned to benefit from the housing recovery. The housing market is rebounding particularly strong in hard hit areas, including Las Vegas.
Under command of Greg Abel, MidAmerican has become the largest US utility based on its customer base. As MidAmerican does not pay dividends to Berkshire, as Buffett cannot use the cash, Abel has been able to grow the business. In 2006, MidAmerican bought PacifiCorp for $5.1 billion.
At the same time, many of its competitors tend to pay out the majority of earnings in dividends, giving Abel a distinct competitive advantage. With the operations in Nevada, MidAmerican is well positioned to expand its efforts in renewable energy sources. The company has solar projects already in Arizona and California.
So overall, the deal seems excellent for both parties. Shareholders in NV Energy receive a fair premium, although it is not too high given the recent pullback in the utility sector. On the other hand, Abel and Buffett are putting a lot of low-yielding cash to work at higher yields, while boosting the long-term growth appeal of its MidAmerican utility business.
For Abel personally, the latest deal marks a successful career at MidAmerican putting him among the top contestants to replace Buffett as a CEO of Berkshire in the future. While this particular deal hardly moves the needle for Berkshire, it shows that Buffett has a lot of very good potential successors surrounding him. This should make investors in Berkshire less worried about the future of Berkshire without him.