Next Berkshire acquisition speculation

[Spekulatius]

I don't think there will be deals. Government money will have significantly better terms than a Warren deal. Prices haven't even come down that much either. You take todays prices, add a control premium and the valuation sucks. If he didn't do the deal 1 or 2 yeas ago why would he do it now?

 

I think we'll see an expanded equity portfolio. The old man is probably buying bank stocks like crazy. And why not? The equity deals you can get right now are better than the deals you would get on the private market.

 

I doubt there is much of a private market right now.

[calonego]

I doubt there’s interest in Boeing - that’s a real schmozzle. Much of it self-inflicted too. Think of all the negatives of that business (foreign competition that’s highly political, incredible leverage, low ROA, highly political without the built in regulated margin of the political businesses BRK owns, etc). Oil? Maybe some, but I can’t see them buying a whole oil company. Who knows.

 

Anything manufacturing they’ve bought has been highly specialized and with better embedded margins.

 

A) Tie-in acquisitions? Always happening. More likely pop up (think Marmon and the Auto dealers). Doesn’t tie up lots of cash though.

 

B) PIPE type deals (prefs/debt with a warrant, etc. Like ‘08). I would bet money the phone is ringing off the hook with deals like this.

 

C) Big Game. A generational buy - like ties up additional capital for a decade. BNSF/Berkshire Energy style.

 

I’d say 100% A happens (keeps happening, but doesn’t move the needle) and more volume than recently (less PE completion).

B almost certainly happens, hopefully enough deals to move the needle. The government handouts are complicated - there were tons of government handouts in ‘08 and BRK still did phenomenal deals of this type.

Fingers crossed they do a HUGE “C” type deal - I like DIS at some price. Almost too big - but rates are zero and maybe you can issue some stock for the best entertainment franchises on the planet.

 

 

Stuck in a relative’s basement with Disney+ (National Geographic) on for the kids...

 

[ERICOPOLY]

AXP; especially if there’s a swoon again similar to the Salad Oil scandal.

 

I suppose if they were willing to give up their Bank charter.  And if they weren't a bank, it would free up Berkshire to acquire Delta without worrying about the Fed fretting over a very material commercial relationship...

 

The government wouldn't help Delta if Berkshire already owned them.  They'd tell Berkshire to help Delta.  So Delta would tie up Berkshire's capital in times like this.  So maybe it's worth more operating alone rather than being owned by deep pockets?

[Spekulatius]

AXP; especially if there’s a swoon again similar to the Salad Oil scandal.

 

I suppose if they were willing to give up their Bank charter.  And if they weren't a bank, it would free up Berkshire to acquire Delta without worrying about the Fed fretting over a very material commercial relationship...

 

The government wouldn't help Delta if Berkshire already owned them.  They'd tell Berkshire to help Delta.  So Delta would tie up Berkshire's capital in times like this.  So maybe it's worth more operating alone rather than being owned by deep pockets?

 

Yes, that’s a pretty good argument against BRK ever to wholly own an airline. Airlines are inherently risky business, operationally levered, safety issues, labor relations, pandemics. BRK would assume a lot of tail risk.

[Jurgis]

Yes, that’s a pretty good argument against BRK ever to wholly own an airline. ... BRK would assume a lot of tail risk.

 

Tail section risk is not that high: https://en.wikipedia.org/wiki/List_of_aircraft_structural_failures 

;D

[fareastwarriors]

 

Warren Buffett’s Berkshire buys Dominion Energy natural gas assets in $10 billion deal

 

https://www.cnbc.com/2020/07/05/warren-buffetts-berkshire-buys-dominion-energy-natural-gas-assets-in-10-billion-deal.html

[AzCactus]

Thank god and about time :)

[LC]

Thank god and about time :)

 

Hear hear!

[Spekulatius]

 

Warren Buffett’s Berkshire buys Dominion Energy natural gas assets in $10 billion deal

 

https://www.cnbc.com/2020/07/05/warren-buffetts-berkshire-buys-dominion-energy-natural-gas-assets-in-10-billion-deal.html

 

Based on  Dominions roughly ~900M negative earnings revision due to the deal, Berkshire got the assets fairly cheap.

[StubbleJumper]

Thank god and about time :)

 

 

That's barely a dent!  Is $10 billion about six months of cash accumulation?

 

 

SJ

[ander]

Anyone familiar with this asset? Obviously he's betting on volumes / continued demand of natural gas that's transport across state lines. Wondering if anyone has any more insights on long-term drivers? anything else that's attractive about the business? (maybe that since it's difficult to build new pipelines, its an even more attractive asset?).

[gfp]

Berkshire Energy's press release is a good place to start.  Sounds like a sensible price and a good fit for BRK Energy.  Ought to be very accretive if they borrow most of their $4 Billion cash consideration.  Doesn't really do anything to help reduce Berkshire's cash position.  I doubt Berkshire even makes a capital contribution to BRK_energy for this.

 

https://www.brkenergy.com/news/berkshire-hathaway-inc--energy-company-to-acquire-dominion-energy-gas-transmission-and-storage-business

[John Hjorth]

Berkshire Energy's press release is a good place to start. ...

 

Thanks gfp,

 

Always go to the primary source as the first thing.

[cubsfan]

Berkshire Energy's press release is a good place to start.  Sounds like a sensible price and a good fit for BRK Energy.  Ought to be very accretive if they borrow most of their $4 Billion cash consideration.  Doesn't really do anything to help reduce Berkshire's cash position.  I doubt Berkshire even makes a capital contribution to BRK_energy for this.

 

https://www.brkenergy.com/news/berkshire-hathaway-inc--energy-company-to-acquire-dominion-energy-gas-transmission-and-storage-business

 

Excellent - thanks for the comments too!

 

[lnofeisone]

Berkshire Energy's press release is a good place to start.  Sounds like a sensible price and a good fit for BRK Energy.  Ought to be very accretive if they borrow most of their $4 Billion cash consideration.  Doesn't really do anything to help reduce Berkshire's cash position.  I doubt Berkshire even makes a capital contribution to BRK_energy for this.

 

https://www.brkenergy.com/news/berkshire-hathaway-inc--energy-company-to-acquire-dominion-energy-gas-transmission-and-storage-business

 

BRK's press release is a good start though I think it could be better written. For example, the press release lists that BRK is buying Questar Pipeline but what I think they meant by it was Questar Pipeline LLC which in turn owns Questar Pipeline (UT-CO), Overthrust Pipeline (WY), and Southern Trails (CA, AZ, NM). The press release also says that the deal doesn't include the acquisition of the Atlantic Coast Pipeline which technically doesn't exist.

 

Short version: D is getting out of mid-west entirely and focusing on retail in midwest and east coast + LNG. BRK is getting regional pipelines in the mountain west and some good assets on the east coast. The most curious part about this is that BRK will be the one operating the Cove Point export terminal. I don't think they have any expertise in the area and are buying it in this transaction. Given where LNG prices are globally, they are probably not paying much premium for the Cove Point.  I think once they get comfortable here they can go after LNG (for growth?) or WMB (to complement their assets?).

 

Long version - D's nat gas profile is very fragmented with presence in the mountain west (UT, WY, CO), a little bit of midwest (OH, WV, PA [i realize WV and PA aren't really mid-west but I don't view them as east coast because they aren't on the coast and it will make this example a tad bit easier]), and east coast (SC, NC, NY). These fragments are not connected by D-owned pipeline. I always look at each fragment two types of operations: pipelines & storage and distribution (to retail/industrial customers). Currently, D performs both operations for every fragment. After the deal, it looks like BRK will own:

1) Pipelines & storage and distribution in the mountain west

2) Pipelines & storage in midwest - I think this is the crown jewel of this transaction as pipelines here move more nat gas than all others combined and it sits in a low break-even zone of marcellus/utica basin

3) Pipelines & storage on east coast

 

 

 

 

[JPerez]

$D going up 10% in premarket.

Dominion has a 70 billion market  cap  and 37 billion in debt so a 107 billion EV utility increasing its value 7 billion on the news that they are selling a quarter of their cash flow for 10 billion.

This market is really something else.

I get that the regulated utility cash flows are worth more than the pipeline ones and 0% rates and all the rest but a well over 100 billion EV for a utility with 3 billion in adjusted earnings?

[aws]

It's given all the gain back now.  It actually traded for $100 when premarket trading opened.  Would have been nice to be up early enough in the morning to short that.

[lnofeisone]

It's given all the gain back now.  It actually traded for $100 when premarket trading opened.  Would have been nice to be up early enough in the morning to short that.

 

It wouldn't surprise me if D trades down a bit more. Looks like they sold decent assets cheap and they are cutting the dividend but this is for the D board. I think BRK got them this cheap because they were willing to buy the entire portfolio. There are more natural buyers for the pipelines (e.g., EPD for Questar and TC for Iroquois)  but that would require a lot more work/time/regulatory hurdles.

[Spekulatius]

It's given all the gain back now.  It actually traded for $100 when premarket trading opened.  Would have been nice to be up early enough in the morning to short that.

 

It wouldn't surprise me if D trades down a bit more. Looks like they sold decent assets cheap and they are cutting the dividend but this is for the D board. I think BRK got them this cheap because they were willing to buy the entire portfolio. There are more natural buyers for the pipelines (e.g., EPD for Questar and TC for Iroquois)  but that would require a lot more work/time/regulatory hurdles.

 

I think Dominion was will to trade this asset cheaply in return for a better ESG rating. I think BRK got these assets for a really good price (11-12x post tax earnings unlevered).

[JPerez]

It's given all the gain back now.  It actually traded for $100 when premarket trading opened.  Would have been nice to be up early enough in the morning to short that.

I thought about shorting it but in this market I am afraid to short even when, like on this case, on the face of it is overwhelmingly rational thing to do.

[gfp]

Looks like the market came around to this view - at least for the time being. 

 

$D going up 10% in premarket.

Dominion has a 70 billion market  cap  and 37 billion in debt so a 107 billion EV utility increasing its value 7 billion on the news that they are selling a quarter of their cash flow for 10 billion.

This market is really something else.

I get that the regulated utility cash flows are worth more than the pipeline ones and 0% rates and all the rest but a well over 100 billion EV for a utility with 3 billion in adjusted earnings?

[Spekulatius]

It's given all the gain back now.  It actually traded for $100 when premarket trading opened.  Would have been nice to be up early enough in the morning to short that.

I thought about shorting it but in this market I am afraid to short even when, like on this case, on the face of it is overwhelmingly rational thing to do.

 

The Price paid by Buffet for sure isn’t bullish for midstream companies ( OKE, WMB, EPD, ET, ENB etc). I think he paid less than any of the above is valued by the market with the possible exception of ET.

[Munger_Disciple]

https://www.npr.org/2020/07/06/887593775/court-rules-that-dakota-access-pipeline-must-be-emptied-for-now

 

I am not sure this news is relevant to the Berkshire deal but it is scary that a US judge ordered an existing and flowing pipeline to be shut down.

[lnofeisone]

https://www.npr.org/2020/07/06/887593775/court-rules-that-dakota-access-pipeline-must-be-emptied-for-now

 

I am not sure this news is relevant to the Berkshire deal but it is scary that a US judge ordered an existing and flowing pipeline to be shut down.

 

It probably helps the railroad side of BRK as now oil out of Bakken will not travel by pipeline. Statistically speaking, it's less safe for ND.

 

The decision isn't really surprising. Trump intervened on behalf of DAPL and the judge called them out on not having an environmental impact statement. There is another pipeline that runs along DAPL (Northern Border) and it's operating just fine. Not really the point the tribes were initially arguing but I think they will take any win.

[gfp]

According to this presentation from Dominion, BHE has committed to de-leveraging the acquired gas assets after purchase.  Including not refinancing $1.2 Billion worth of maturities in the next 12 months (11-2020 and 6-2021).  So I guess that would require a capital contribution from Berkshire and, depending on if Scott family and Abel chip in, an increased ownership interest in BHE for Berkshire parent co.

 

So it could be $5.2 Billion -ish of cash that gets put to work here.  Or deleveraging DEGH could just mean BHE borrows at a higher level outside of this entity.  Who knows...

 

https://www.sec.gov/Archives/edgar/data/715957/000119312520187844/d939155dex992.htm

 

presentation page 15 shows deleveraging commitments over the next 12 months