U.S. stocks are higher on Tuesday afternoon, with the Dow Jones Industrial Average (^DJI 0.02%) and the S&P 500 (^GSPC 1.04%) both up 0.57% at 1:50 p.m. EST. Shares of ITC Holdings Corp. are up another 2.22% today, after gaining 9.3% yesterday on a report by Bloomberg that the U.S.'s largest independent electricity transmission company is considering a sale. The Financial Times reported this morning that Warren Buffett's Berkshire Hathaway Inc. is one of the companies exploring a bid for ITC.
At first glance, this looks like an interesting opportunity for Berkshire Hathaway and its regulated energy business, Berkshire Hathaway Energy (BHE). The Financial Times writes:
Bids for ITC will represent bets on the future of investment in the US power grid. Its business involves operating regulated high-voltage transmission lines, and the company needs to invest in more assets in order to increase its earnings.
That's entirely consistent with Buffett's commitment to and objectives for Berkshire Hathaway Energy. As he wrote in last year's 50-year anniversary Berkshire Hathaway shareholder letter:
And the beat goes on: We will continue to buy and build utility operations throughout the world for decades to come.
... [W]e have conventional projects in the works [at BHE] that will also cost many billions. We relish making such commitments as long as they promise reasonable returns -- and, on that front, we put a large amount of trust in future regulation. Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy.
Furthermore, Buffett has the right man to vet and, if need be, complete this acquisition. When The Wall Street Journal ran a profile of Berkshire Hathaway Energy CEO Greg Abel, it was titled "Greg Abel: an Astute Dealmaker Who Shuns the Spotlight."
Buffett himself appeared to confirm this when he told the University of Alberta business school alumni magazine in 2013 (my emphasis): "I get a lot of phone calls each day, and I always make time for Greg when he calls, because he brings me great ideas and is truly innovative in his thinking and business approach."
That same year, MidAmerican Energy (now Berkshire Hathaway Energy) acquired Nevada utility NV Energy for $5.6 billion (though Buffett did not include the deal within his tally of Berkshire's "bolt-on" acquisitions). In his 2013 Annual Letter, Buffett wrote that "NV Energy will not be MidAmerican's last major acquisition"
Nevertheless, in setting out Berkshire's acquisition criteria -- which he included in his most recent shareholder letter -- Buffett is insistent on one point: "We don't participate in auctions." The emphasis is his.
In 2008, for example, MidAmerican entered into an agreement to acquire the nation's largest wholesale power seller, Constellation Energy, for $4.7 billion in equity value (the enterprise value, which includes net debt, was approximately $9.5 billion).
When Constellation backed out of the agreement and sold half of its nuclear-power activity to Electricite de France SA instead, Berkshire declined to enter into a bidding war in order to salvage the deal (and received a tidy $593 million termination package for its trouble).
Bloomberg reported yesterday that the U.K.'s National Grid plc of the U.K. and Iberdrola SA of Spain may also be considering bids for ITC Holdings.
As of today, ITC Holdings has a market capitalization of $5.8 billion (enterprise value: $10.2 billion), which would make it the largest "bolt-on" acquisition in Berkshire Hathaway's history by a large margin.
However, the setup for this deal would be highly atypical for Berkshire, which generally announces agreed deals after conversations in which it is the sole potential acquirer. It's therefore unlikely that Berkshire would step into the fray, here, even if ITC looks like a very good fit with its energy business.