Berkshire Hathaway Acquires BHE Minority Interests
Berkshire Hathaway has acquired the remaining minority interests in BHE from the Scott family and now is the sole owner of the energy company.
Berkshire Hathaway Energy (BHE) is now a wholly owned subsidiary of Berkshire Hathaway.
On September 30, 2024, BHE repurchased part of the minority interest held by family members of the late Walter Scott Jr., along with interests owned by “related or affiliated entities.” The remainder of the minority interest was acquired by Berkshire Hathaway in exchange for Berkshire Class B common stock.
Prior to the transaction, Berkshire Hathaway owned a 92% interest in BHE. The transaction has interesting implications regarding the diminished value of BHE after recent wildfire litigation and changes in the regulatory and political landscape. In addition, since Berkshire Hathaway issued shares to pay for part of the transaction, there may be implications regarding Warren Buffett’s view of the valuation of Berkshire shares.
The following is my analysis of the transaction:
The valuation of the BHE common stock is listed as $650 per share in the repurchase agreement.
BHE acquired 4,424,494 shares of BHE common stock at $650 per share, implying a total cost of $2,875,921,100.
BHE acquired the 5% Junior Subordinated Debentures due in 2057 with an aggregate principal amount of $100,000,450. This security was owned by the same minority investors who sold the common stock. I calculate that the cost of acquiring this security was $91,359,744.
BHE paid total consideration of $2,367,280,844 in cash and issued a promissory note for $600,000,000 due and payable in one year and bearing interest equal to the one year treasury rate.
BHE funded the cash portion of the transaction “with cash on hand, including proceeds received from the sale of certain investments.”
In a separate transaction, Berkshire Hathaway acquired 1,601,258 shares of BHE common stock for “an equivalent value in shares of Berkshire Hathaway Inc. Class B common stock.” Berkshire’s Class B shares closed at $460.26 on September 30, 2024. Assuming a valuation of $650 per share of BHE common stock, the transaction value was $1,040,817,700 and was funded with issuance of 2,261,369 Berkshire Hathaway Class B shares.
The end result is that Berkshire Hathaway is now the sole owner of BHE. Berkshire Hathaway did not use its massive pile of cash at the holding company level to fund these transactions. BHE funded the repurchase using cash on its balance sheet in addition to issuing the $600 million promissory note. Berkshire chose to fund the purchase of the remaining minority interest by issuing Class B shares rather than using cash.
As I explained in much detail earlier this year, BHE is facing a very uncertain future due to wildfire litigation costs and major changes in the regulatory and political landscape. I will not go into all the details regarding this situation here since they are well covered in my earlier article. However, it is worth pointing out that Berkshire Hathaway has implicitly conceded that BHE is worth far less today than it was just a couple of years ago. We know this because it is possible to compare the price paid to acquire the Scott family interests with the price Berkshire paid to acquire Vice Chairman Greg Abel’s interest in 2022.
In my article covering the second quarter of 2022, I wrote about Greg Abel’s sale of his 1% stake in BHE of 740,961 shares for $870 million which implied a price per share of $1,174.15. Just a little over two years later, the Scott family has sold for just $650 per share. This implies that BHE’s valuation has dropped from ~$88.8 billion to ~$48.9 billion, a decline of nearly 45%. It is interesting to note that a prior transaction to repurchase some of Mr. Scott’s interest in March 2020 implied a valuation of $53.4 billion. It would appear that Greg Abel received a rich price for his shares in retrospect. Mr. Abel subsequently used part of the cash proceeds to purchase shares of Berkshire Hathaway in September 2022.
It is also interesting to note that BHE’s shareholders’ equity was $49.9 billion as of June 30, 2024. This would imply that Berkshire Hathaway believes that BHE is currently worth approximately book value. It should be noted that included in BHE’s shareholders’ equity is $11.5 billion of goodwill, so by paying a valuation roughly equal to BHE’s book value, Berkshire is implicitly affirming the value of BHE’s goodwill on its balance sheet. However, there is no doubt that much economic goodwill above and beyond BHE’s book value has evaporated over the past two years.
Walter Scott Jr. was a longtime friend of Warren Buffett, a Berkshire Hathaway board member, and a partner in BHE since Berkshire took its initial ownership stake nearly a quarter century ago. I believe that Mr. Buffett did not seek any advantage for Berkshire when estimating BHE’s market value in the company’s transactions with Mr. Abel and with Mr. Scott’s family. However, he also clearly insisted on a lower valuation now that BHE’s future prospects seem dimmer.
It is notable that Mr. Buffett was willing to issue a little over $1 billion in Class B shares as part of this transaction. Berkshire is typically unwilling to issue shares, especially when Mr. Buffett considers the stock to be trading well below intrinsic value. However, with Berkshire’s stock rising rapidly in recent months and no longer trading at a bargain basement level, Mr. Buffett stopped repurchasing shares in the latter part of the second quarter and my expectation is that he did not repurchase shares in the third quarter. With Berkshire’s stock trading relatively near fair value, he might have wanted to accommodate the Scott family’s desire to defer taxes through a share exchange rather than taking cash. Berkshire most certainly had the cash to fund the transaction rather than issuing shares.
It is understandable for Walter Scott’s family to diversify away from a concentrated position in a troubled energy business with an uncertain political and regulatory future. Warren Buffett was serious when he expressed grave reservations regarding the future of the industry in his 2023 letter to shareholders:
“Our second and even more severe earnings disappointment last year occurred at BHE. Most of its large electric-utility businesses, as well as its extensive gas pipelines, performed about as expected. But the regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California’s largest utility and a current threat in Hawaii). In such jurisdictions, it is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America.”
There is a tendency among some Berkshire shareholders to behave as “perma-bulls” when it comes to evaluating the business. This is a sign of cult-like behavior. Berkshire Hathaway has a large collection of businesses and it is inevitable that some of them will perform poorly at any given point in time. It is unfortunate that BHE is in trouble given its size in Berkshire’s overall portfolio of businesses, but it would have been difficult to forecast its troubles. Such is the reality of business life, even for Warren Buffett.
If politicians do not come to their senses soon and ensure a rational regulatory and legal climate, Berkshire is likely to stop allowing BHE to plow all of its free cash flow into reinvesting in the business and may begin to treat the company as a cash cow, which is the way most investors view holdings in the energy industry. This would be a lose-lose proposition. Berkshire would not be able to reinvest BHE’s earnings at reasonable, albeit unspectacular, returns and governments will end up having to take on the immense task of investing the tens of billions of dollars needed to harden the electric grid to deal with fire and other climate risks.
Given the utter stupidity of most politicians, particularly those running “progressive” states whose entire political “brand” is to vilify private enterprise and “billionaires,” I am not optimistic about prospects for a rational outcome for BHE or the electric utility industry in general.
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