Berkshire Unit to Acquire PacifiCorp for $5.1 Billion
MidAmerican Deal With Scottish Power Marks Buffett's Return to Big Acquisitions
KAREN RICHARDSON & REBECCA SMITH / Wall Street Journal 24may2005
Berkshire Hathaway Inc.'s MidAmerican Energy Holdings Co. agreed to buy U.S. electric utility PacifiCorp from British Scottish Power PLC for $5.1 billion in cash, plus debt assumption of $4.3 billion.
The deal, which marks Berkshire's biggest acquisition since 1998, will create an energy holding company serving three million electric and natural-gas customers in 10 states and 6.6 million customers world-wide.
The transaction also signals the return of Warren Buffett, Berkshire's chairman, to the acquisition trail after several years of lamenting the lack of big buying opportunities.
But the deal faces one large hurdle — how to get around a 1935 federal law that places many restrictions on utility mergers. It is possible that Berkshire, which owns an 80% interest in MidAmerican, would have to reduce its stake or spin off the unit entirely.
Another possibility is that Mr. Buffett intends the deal to put pressure on Congress to repeal the Public Utility Holding Company Act, as the Senate is considering this week. The House previously voted to repeal the merger-restricting act as part of an omnibus energy bill.
Mr. Buffett has previously said he would invest up to $10 billion in the utility industry if the act were repealed.
"We are seeing a lot" of investment opportunities, Mr. Buffett said in a phone interview from London. "We like large deals and we like things we can understand," he added. Berkshire has more than $40 billion in cash, mostly generated from Berkshire's insurance businesses, that Mr. Buffett wants to use to buy companies and make big investments.
Berkshire's share price, which has been languishing for months due to various regulatory investigations into its General Re reinsurance unit and the company's mounting cash pile, climbed $1,510 to $85,000 on Tuesday on the New York Stock Exchange. Scottish Power's shares gained 5.7%, or $1.84, to $34.20 on the Nasdaq Stock Market.
A 'Good Fit'
MidAmerican said it will purchase all outstanding shares of PacifiCorp common stock for approximately $5.1 billion in cash plus approximately $4.3 billion in net debt and preferred stock, which will remain at PacifiCorp.
"MidAmerican is a good strategic fit for PacifiCorp," Scottish Power Chief Executive Ian Russell said in a statement. "We strongly believe that this transaction is in the best interests of PacifiCorp's customers and employees." PacifiCorp will require about $1 billion a year in capital investment for five years.
PacifiCorp was formed in 1984 and provides service to customers in California, Idaho, Oregon, Utah, Washington and Wyoming. In 1989, it merged with Utah Power & Light, and continued doing business as Pacific Power and Utah Power. In 1999, PacifiCorp merged with Scottish Power. PacifiCorp operates as Pacific Power in Oregon, Washington, Wyoming and California; and as Utah Power in Utah and Idaho.
The transaction has been approved by the boards of both companies, but is subject to the approval of Scottish Power shareholders and state and federal regulatory agencies. If approved, it would create a company with assets totaling more than $32 billion internationally, of which $25.3 billion are in the U.S., MidAmerican said. The transaction is expected to be completed in 2006.
Following the acquisition, MidAmerican will have $10 billion in annual revenue, of which $8.5 billion will be from the U.S. It will own, operate and have under construction or in advanced development more than 16,000 megawatts of electric generation in the U.S.
Mr. Buffet said in a statement that Berkshire will look to acquire energy assets around the world, and that "there is no limit to the money we have to spend." The acquisition of PacifiCorp fits this strategy "to a T," he added.
"The energy sector has long interested us, and this is the right fit," he said. "We are excited to be making this long-term investment, through MidAmerican, in the premier energy company in the West."
David Sokol, chairman and CEO of MidAmerican, which is based in Des Moines, Iowa, said the acquisition would expand the utility's presence in the western U.S. PacifiCorp operates in six states: California, Idaho, Oregon, Utah, Washington and Wyoming. MidAmerican is Iowa's biggest power utility and operates in four states.
Mr. Russell said PacifiCorp has struggled amid poor weather conditions, which hurt hydro-electric generation, and market conditions that were less liberalized than the company had originally anticipated. He said the scale of investment that would have been required to generate adequate returns made it more attractive to sell the unit and return $4.5 billion to shareholders.
No job cuts are expected as a result of the sale. PacifiCorp will operate under its current name and structure and will continue to be headquartered in Portland.
A New Direction
For Scottish Power, the disposal of PacifiCorp marks a change in focus to its United Kingdom divisions and a fast-growing wind-power and natural-gas-storage business owned by U.S. unit PPM Energy.
Analysts said the sale of PacifiCorp will raise speculation about a tie-up between Scottish Power and Scottish & Southern Energy, which has appeared to steer clear of any deal with its U.K. peer, partly due to concerns about Scottish Power's U.S. operations. Any such tie-up would raise monopoly concerns in Scotland, so approval by regulators could be an obstacle. Scottish & Southern Energy declined to comment Tuesday.
Scottish Power also reported fiscal-year earnings Tuesday. For the 12 months ended March 31, the company said it had a net loss of £308 million (about $564.4 million), compared with a net profit of £537.9 million for the prior fiscal year. Earnings before taxes and goodwill amortization rose 10%, pushing above £1 billion for the first time in the company's history. This compares with pretax profit before items of £920.1 million last year. Revenue increased 17% to £6.8 billion from £5.8 billion.
—Dow Jones Newswires contributed to this article.
Berkshire Hathaway Inc.'s Holdings
A selection of Berkshire's subsidiaries
Subsidiaries of MidAmerican Energy Holdings
- CalEnergy Generation: Generates more than 2,029 megawatts of electric power and steam-producing facilities in the U.S. and the Philippines.
- Kern River Gas Transmission: The pipeline system brings natural gas into Utah, Nevada and California, and has a design capacity of more than 1.7 billion cubic feet per day.
- MidAmerican Energy Co.: The largest utility in Iowa, providing service to more than 698,000 electric customers and more than 680,000 natural gas customers.
- Northern Natural Gas: Provides transportation and storage services to 75 utilities in the upper Midwest.
- CE Electric U.K.: Delivers electricity to 3.6 million homes in the Northeast of England, Yorkshire and Humberside.
- Clayton Homes: Makes and sells mobile homes.
- Dairy Queen: Ice cream and fast-food restaurant chain founded in 1940 and purchased by Berkshire Hathaway in 1998.
- Fruit of the Loom: Manufacturers underwear and clothing. Purchased by Berkshire Hathaway in 2002.
- Johns Manville: Manufactures and markets building insulation, commercial roofing and roof insulation.
- Geico: Low-cost insurer for autos and homes.
- General Re Corp.: A holding company for global reinsurance and related risk assessment, risk transfer and risk management operations.
- McLane Co.: Distributes groceries and foodservice throughout the U.S.
- NetJets: Offers travelers fractional ownership in private jets.
- See's Candies: A chain of candy and sweets shops founded in 1921.
Source: the company