Buffett Buys While the Blood Runs

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We all know the maxim to buy when there's blood in the streets. But who's doing the buying? Why, it's none other than Warren E. Buffett. You didn't think he was going to sit on that pile of cash forever, did you?

The Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) chairman has long expressed an eagerness to sink his money into regulated utilities. That's why Berkshire bought a 75% stake in MidAmerican Energy Holdings back in 1999. Now MidAmerican, in turn, is picking up Constellation Energy Group (NYSE: CEG  ) for $26.50 a share. 

In his most recent letter to shareholders, Buffett detailed MidAmerican's astonishing ascent since Berkshire bought its stake. Earnings grew from $2.59 per share back then to more than $15 in 2007. MidAmerican has grown primarily through acquisitions of large businesses with stable earning power.

But stability is the antithesis of what we've seen at Constellation. August jitters broke into an all-out jostle for the exits on Wednesday, as the utility's investment-grade credit rating appeared to hang by a thread. The company released a statement yesterday stating, in effect, that everything was fine but also noting that it was seeking strategic alternatives. Not exactly reassuring.

Fortunately for Constellation, Buffett and MidAmerican chief David Sokol were just a phone call away, and a deal was cut with typical Omaha-style expediency. MidAmerican gets Constellation for less than five times the midpoint of the latter's 2008 earnings guidance, reiterated just yesterday.

This is a dynamite deal for MidAmerican. Constellation is looking to sell off its exploration-and-production business, just as Dominion (NYSE: D  ) shipped off most of its onshore natural-gas assets to XTO Energy (NYSE: XTO  ) , Loews (NYSE: L  ) , and Linn Energy (Nasdaq: LINE  ) last year. That leaves a top electric generation and distribution business, including some choice nuclear assets. This discount entry into the nuclear business may be the most promising part of the purchase.

I hope you've been more patient than yours truly and kept some powder dry. If you see something selling for far below intrinsic value, follow Buffett's lead -- now is the time to buy.

Berkshire Hathaway is both a Stock Advisor and an Inside Value pick. Constellation Energy is an Income Investor selection. Check out any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool owns shares of Berkshire Hathaway. It also has some dry powder, not to mention a top-notch disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 18, 2008, at 4:36 PM, decboy67 wrote:

    Sure. And what about the poor CEG stockholders who got royally screwed in this deal? As you say, five times earnings?

    This was a mom-and-pop investment.

    Somebody should be jailed over crap like this.

    I don't blame Buffett, a keen and respectable investor.

    But, CEG management? That's another story. Maybe one some attorneys general should look into.

  • Report this Comment On September 18, 2008, at 4:50 PM, weiwentg wrote:

    CEG was no ordinary utility. It had nice regulated assets, but it also had a trading division. The latter was what killed it. CEG was almost required to post collateral it didn't have. The alternative was letting CEG go bankrupt and being broken up. Mom and pop investors had no place in this company.

  • Report this Comment On September 19, 2008, at 7:09 PM, 4cats2go wrote:

    So CEG was NOT for the "mom & pop" investors? Then why was it so highly rated?

    The winners in this are Buffet and Mayo Shattuck who walks away with 47+ million,

    this looks very similar to the deal Shattuck tried to effect with FPL where he also would have walked away with mega millions, leaving the "mom & pop" ( who had this stock since the days of BGE and who relied upon the dividend) holding the bag. The day before the sale, CEG reiterated its earnings guidance & the day before the sale they were selling on the exchange for $31/sh. Compared to some, I don't have many shares (only 400), but I'm mad as hell about this lousy deal which removes my dividend and sticks me with a capital gain at the same time. Not that it will stop the deal, but I certainly intend to vote against it, just as I have voted against Shattuck and his board of puppets for the last few years.

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