You have to admire a beautifully crafted corporate prenup.
In September, with the shares of Constellation Energy (NYSE: CEG ) collapsing over fears of a liquidity crunch, Warren Buffett flew to the rescue with a $1 billion preferred share investment and a $26.50-per-share bid for the whole company, for an equity valuation of $4.7 billion. (The acquisition offer was made by Berkshire Hathaway subsidiary MidAmerican Energy). The acquisition bid failed, but Buffett set the stage for an extraordinary profitable "failure."
A show of brazen opportunism
As you can imagine, Buffett wasn't stepping in out of a sense of charity -- the deal was pure opportunism, in the best sense of the term. His offer price was thought to represent a discount to the value of Constellation's nuclear plants alone.
That kind of discrepancy usually attracts attention; French electricity giant EDF trumped MidAmerican with a $4.5 billion offer for 50% of Constellation's nuclear generation and transmission assets. Buffett isn't walking away with his prey this time, but he's too busy counting the money he made by not completing the deal to get too upset.
To the loser go the spoils
MidAmerican will pocket cash payments totaling almost $600 million, including a $175 million breakup fee. MidAmerican's preferred-share investment also converts into $1 billion in senior notes that mature at the end of 2009 and pay a hefty 14% interest. Finally, MidAmerican gets a 9.9% interest in Constellation Energy.
EDF estimated that terminating the agreement with MidAmerican would end up costing $2.4 billion in liquidity -- a figure that implies more than a 100% return on Buffett's initial investment over a 16-month holding period. That's a very profitable failed bid, particularly if one considers that Buffett puts together deals very quickly, without resorting to outside advisors.
Compare Berkshire's outcome to that of the erstwhile acquirers in the following collapsed deals:
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Target
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Acquirer(s)
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Outcome
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Huntsman (NYSE: HUN )
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Apollo Management LP
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Apollo will pay Huntsman a $425 million cash breakup fee and buy $250 million in 7% convertible notes.
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BCE (NYSE: BCE )
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Ontario Teachers' Pension Plan, Madison Dearborn Capital Partners, Providence Equity Partners
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BCE is suing the buyers for $1.2 billion in Canadian dollars ($1.0 billion U.S.) in breakup fees.
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Alliance Data Systems (NYSE: ADS )
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Blackstone Group (NYSE: BX )
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Alliance Data Systems is suing Blackstone to obtain a $170 million breakup fee.
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Penn National Gaming (Nasdaq: PENN )
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Fortress Group (NYSE: FIG ) , Centerbridge Group
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Penn National Gaming receives a $225 million breakup fee and a $1.2 billion interest-free loan.
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I'm sure some people will bend over backward to spin this as a major defeat for Buffett. While he surely would have preferred to complete the acquisition of Constellation, I think he was very well aware that there was a significant chance his brazen gambit might fail. Indeed, he prepared a "retreat" that hardly has him walking away with his tail between his legs. Structuring a deal in which the worst outcome is a grand slam -- now that's the mark of business genius.
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