Shares of Nevada electric generating company NV Energy (UNKNOWN:NVE.DL) closed at $23.81 on Wednesday. What makes that newsworthy is that any investor buying NV Energy shares at that price has what's essentially a guarantee from Warren Buffett of a capital loss on that investment.
The reason that loss is virtually guaranteed comes in the form of a buyout agreement. Buffett's Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is buying NV Energy for $23.75 per share in cash, with the deal expected to close in the first quarter of 2014. As the agreement has already been approved by NV Energy shareholders, chances are incredibly slim that a better offer will come along.
$23.75-$23.81 = ($0.06)
As a result, anyone paying $23.81 per share for NV Energy can reasonably expect to receive $23.75 per share when the deal closes. That's a capital loss of $0.06 per share, even before considering commissions. That capital loss will hold true as long as Buffett and his team at Berkshire Hathaway manage to successfully close the deal, which is still subject to regulatory approvals.
If for some reason the deal falls apart, an investor buying NV Energy's shares today will be at risk for a capital loss of significantly more than $0.06 per share. The reason for that risk is the fact that Berkshire Hathaway's acquisition price values NV Energy at around $5.6 billion. That's around 12% above the $5.0 billion valuation estimate NV Energy looked to be worth last December when it was selected for the real-money Inflation-Protected Income Growth portfolio.
Did Buffett overpay?
That valuation discrepancy may seem out of sorts for a noted value-oriented investor like Buffett and the Berkshire Hathaway conglomerate he controls. In reality, though, it's probably a reasonable price to pay for NV Energy, given that it will be integrated with Berkshire's MidAmerican Energy unit.
A lot of work goes into managing, maintaining, and operating an electric company. By integrating NV Energy with the much larger MidAmerican, MidAmerican can achieve operational efficiencies and other cost reductions that NV Energy couldn't get on its own. That makes NV Energy worth more to MidAmerican than it was as a stand-alone company, making the acquisition price reasonable.
What are new stock buyers thinking?
Still, while $23.75 may be a fair price for Berkshire to pay for NV Energy, that doesn't mean it makes sense for retail investors to pay $23.81 for those shares today. Indeed, there is only one possible reason it may make a little bit of sense for someone to pay $23.81 for NV Energy stock: its dividend. NV Energy has maintained its $0.19-per-share dividend, payable on December 18.
Investors paying $23.81 per share now will get that $0.19 dividend before being forced to turn around and sell the shares at $23.75. In addition, depending on when the acquisition closes (and if NV Energy continues to maintain its dividend), investors may get a dividend in the first quarter of 2014 as well. Put it all together, and with enough shares bought for a low enough commission, there's a chance of winding up with a net positive total return on an investment in spite of the capital loss.
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