BREAKFAST WITH THE FOOL
Monday, October 25, 1999
"All of life is the management of risk, not its elimination."
-- Walter Wriston
Berkshire Hathaway Buys Majority Stake in Electric Utility
Richard McCaffery (TMF Gibson)
World famous value investor Warren Buffett has taken the plunge into the utility business as part of a group that's buying MidAmerican Energy Holdings (NYSE: MEC) for about $9 billion in cash and assumed debt.
Now investors have to add electric utilities to the list of diversified businesses under Buffett's Berkshire Hathaway (NYSE: BRK.A) corporate umbrella, which includes property and casualty insurance firms, shoe stores, jewelry stores, and candy stores.
Under the deal, Berkshire will pay about $35.05 per share in cash, a 29% premium to MidAmerican's closing price of $27.25 on Friday. Berkshire is investing $1.25 billion in common stock and convertible preferred stock, as well as an $800 million issue of nontransferable preferred stock for a 75% stake in the company. The deal is expected to close in April 2000, at which time MidAmerican will become a private company with publicly traded fixed-income securities.
So why the electric utility business? "We buy good companies with outstanding management and good growth potential at a fair price, and we're willing to wait longer than some investors for that potential to be realized," Buffett said.
Based in Des Moines, Iowa, MidAmerican, through its retail subsidiaries MidAmerican Energy and Northern Electric in the United Kingdom, offers electricity to 2.2 million customers and natural gas to 1.2 million. MidAmerican also owns HomeServices.Com (Nasdaq: HMSV), a residential real estate brokerage firm that went public October 14.
This may get Buffett, who made his fortune and enriched Berkshire shareholders without ever adding technology stocks to his portfolio, closer to the Internet economy than many thought he would ever get. But HomeServices.com isn't some shaky Internet start-up. The company is one of the largest real estate brokerages in the U.S. with more than 140 offices in 10 Midwestern states.
MidAmerican's stock price has fallen from a 52-week high of $36 1/16 since July, and HomeServices.Com closed Friday at $15, the same price at which it went public.
Investors should spend a little time today looking at MidAmerican's financials, however. The company has $13 billion in assets, has grown earnings 26.7% over the last five years, and generates a 16.6% return on equity. Its book value is about $16 a share.
News to Go
Long distance telecommunications leader AT&T (NYSE: T) said operating profit fell 4.5% to $1.75 billion, or $0.54 per share, as a result of heavy price competition.
For the first time ever, direct sales PC company Dell Computer (Nasdaq: DELL) sold more PCs in the U.S. over a three-month period than rival Compaq Computer (NYSE: CPQ), The Wall Street Journal reported.
Information technology solutions company IMRglobal (Nasdaq: IMRS) plans to use the purchase method of accounting rather than the pooling method, as previously stated, to account for its purchase of Fusion Systems Japan and Orion Consulting. In addition, the company's board announced plans to repurchase 4 million shares of common stock.
Defense and aerospace contractor Lockheed Martin (NYSE: LMT) is delaying the release of its Q3 financial report to Friday from Tuesday to provide shareholders with more information about its new business units.
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