After the market close, Berkshire Hathaway Inc. (BRK.A) (BRK.B)’s MidAmerican Energy Holdings has reached a definitive agreement to purchase, all cash, shares of NV Energy for $23.75 or a 23% premium to the May 29, 2013 closing price of $19.28. The deal is expected to close in Q1 2014 subject to state, federal and shareholder approvals. With 235mm shares outstanding, the deal is valuing NV Energy, Inc. (NYSE:NVE) equity at ~$5.6B. From an Arb perspective, with 3-4 quarters of dividends to be collected between now and deal closure, shares could trade above the deal value in the near term and flat line back to $23.75 as dividends are paid and time value is incorporated.
“This is a great fit for Berkshire Hathaway, and we are pleased to make a long-term investment in Nevada’s economy,” Buffett said in a statement Wednesday. “We have found in NV Energy a great company with similar values, outstanding assets, and a superb management team.”
MidAmerican Energy Expands West
With NV Energy, Inc. (NYSE:NVE) mothballing coal, building gas and renewables, the portfolio seems to strategically fit within MidAmerican. Pre acquisition, MidAmerican served ~7mm gas and electric customers in various states ex Nevada. With the acquisition, gas and electric customer base will increase to ~8.5mm customers with new exposure into Nevada.
Given Berkshire Hathaway Inc. (BRK.A) (BRK.B)’s utility presence in Nevada’s surrounding states of Utah, Idaho, Oregon, and northern California, the acquisition of NV Energy complements Berkshire’s broader footprint in the region. NV Energy, Inc. (NYSE:NVE) is also a good fit for Berkshire Hathaway Inc. (BRK.A) (BRK.B) given the improved regulatory environment in Nevada, the reduced regulatory lag, and the growing dividend supporting by enhanced free cash flow.
In the deal, MidAmerican Energy gets a modestly growing utility with a call option on a return to higher growth in the state of Nevada. MidAmerican Energy also gets one of the few utilities with a positive free cash position; Barclays model NVE with $100 million-$200 million of FCF over the next 3 years.
MidAmerican Energy Synergies
Strategically, the merger makes sense for MidAmerican Energy in that NVE’s utilities are located between MEHC’s PacifiCorp units in Utah and Oregon. Recent history in utility mergers suggests 5-8% O&M synergies is a reasonable operating goal according to Barclays; although Buffet has a history of letting his acquisitions function as standalone entities, with the one obvious advantage of having access to Berkshire Hathaway Inc. (BRK.A) (BRK.B)’s balance sheet and financing capabilities.
But MidAmerican bid not only about synergies
Year-to-date, regulated utility outperformance has completely reverted versus the broad market. In early May, regulated utilities were outperforming the broad market by over 300 bps. Since then, regulated relative outperformance has completely dissipated, with the sector now lagging the broad markets by over 500 bps – a reversion of almost 800bps. NVE shares traded as high as $21.63 at April month end which would have made the transaction using today’s economics less enticing. With the shares now closer to lows of the year – the deal is well timed.
MidAmerican Standard Acquisition Procedures
The estimated deal closing date is 1Q14, with approvals required from the majority of NV Energy shareholders, as well as from the Public Utilities Commission of Nevada (PUCN), the Federal Energy Regulatory Commission (FERC), and the Department of Justice. Shareholder approval is only needed on the NVE side and, the fact that it’s an all cash deal with no financing involved. The merger agreement also includes potential termination fees of $56.6 million to $169.7 million under certain circumstances, although what triggers which fee is a little unclear.
Expect MidAmerican Deal to Be Approved
Investors do not foresee any obvious competing offers that could complicate this deal among strategic players, although infrastructure funds might show an interest. At this juncture, there doesn’t appear to be any antitrust issues at the surface. The approval from the PUCN could be a sticky point with job safety, rate impact and any potential regulated synergy claw-backs at the forefront of the Commission’s agenda.
While some expect push-back from state legislators given that the state would lose its only independent electric utility in the state, the plans to keep NV Energy’s headquarters in Las Vegas will provide a level of concession that should allow the deal to go through. NVE management will remain to run the new subsidiary. In addition, RBC believes that “the brand name of Berkshire Hathaway” as the acquirer carries enough weight to reduce skepticism from regulators and legislators. Finally, With MidAmerican’s access to low cost capital, large balance sheet, renewable development expertise coupled with the items mentioned above, this transaction should be an easier sell to the Commission vs. other regulated transactions historically.
Goldman math on MidAmerican deal
The proposed transaction price of $23.75 from Berkshire Hathaway Inc. (BRK.A) (BRK.B) implies 18.3x/17.8x on Goldman Sachs’ 2013/2014 EPS estimates, a premium to Regulated Utilities trading at an average of 15.8x/14.9x. The enterprise value of the deal, as approved by the NV Energy, Inc. (NYSE:NVE) and MidAmerican board of directors, is $10bn.
Goldman assumes a blend of 50% fundamental valuation ($21) and a 50% M&A valuation ($23) and assign NV Energy, Inc. (NYSE:NVE) an M&A rank of 1. Their M&A-based valuation assumes a 17x FY2 P/E multiple, one standard deviation above the average regulated utility multiple since 2005.