Berkshire Hathaway Inc. (NYSE:BRK.A) set to Acquire Oncor

July 10, 2017, 13:16 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Recently, Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) announced that it had closed a deal to acquire Oncor Electric Delivery Company LLC, a major electricity transmission company in Texas.

The deal was announced in a joint statement by the two companies, but it is yet to get approval from Texas regulators. This might be an uphill task for Berkshire Hathaway Energy given that the regulators have so far rejected bids to buy Oncor from two other companies.

Oncor Electric Delivery Company LLC has been looking for new owners ever since its parent company Energy Future Holdings declared bankruptcy in 2014. Energy Future Holdings has been working to restructure at least $50 billion of debt since that time.

However, an $18 billion acquisition bid by NextEra Energy Inc (NYSE:NEE) was rejected by the Public Utility Commission of Texas for the third time last week. Another takeover bid by the Hunt family was also rejected by the Texas regulator on the basis that the two bids were not in the best public interest.

Berkshire Hathaway has offered an all-cash bid of $9 billion for 100 percent of Oncor, which implies that Energy Future Holdings Corp. has an equity value of $11.25 billion.

A statement from both companies indicates that the takeover deal will be finalized in the last quarter of this year. However, the deal is subject to approvals from federal and state authorities as well as the bankruptcy court.

Analysts expect Texas regulators to approve the deal given Berkshire’s proven track record of improving the operations of its large utilities, while maintaining flat rates for consumers. Berkshire’s energy unit does not issue dividends to the parent company; hence, most profits generated are used to improve the infrastructure of its utility holdings.

Not all of Buffett’s investments in utility companies have proven successful, which was the case with his $2 billion bond investment in Texas Competitive Electric Holdings. Buffett incurred a loss of $873 million pre-tax on this deal, but has since been on the record stating that investments in utility companies offer reasonable returns.

The impact of Berkshire Hathaway’s deal with Oncor on energy sector ETFs such as the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), and the Vanguard Energy ETF (NYSEARCA:VDE) remains to be seen given that these ETFs have been recently declining.

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