Warren Buffett's Elephant Gun Could Target Utilities Deals
NEW YORK (TheStreet) -- Did Warren Buffett give a not so subtle hint that his "elephant gun" is targeting utilities, a sector where Berkshire Hathaway's
Buffett fanned speculation at last weekend's Berkshire Hathaway annual meeting about another big acquisition when he said Berkshire had come close to cutting a $22 billion deal during the last quarter of 2011. Buffett said that the deal fell apart because of a disagreement on price and his unwillingness to sell any of his stock investments, nevertheless, he expressed confidence that in the future Berkshire will be able to bag M&A prey as large or larger than Berkshire's $26.5 billion acquisition of Burlington Northern Santa Fe.
Buffett's elephant gun is nothing new, and the never-ending question is what companies could Berkshire buy?
The universe of potential deals to speculate over is expansive, given Berkshire's financial might and the number of sectors in which the company already has exposure and a predilection for deals. However, Buffett's statement that the firm is looking to invest $100 billion in MidAmerican Energy may be worth a focus.
Investing Berkshire Hathaway's cash faster than the company generates it has become a major issue for Warren Buffett as Berkshire's cash stockpile sits at above $37 billion and the company draws in $1 billion a month in free cash flow. This cash "problem" has spurred the legendary value investor to put his money behind consistent-returning but capital intensive businesses like railroad BNSF in 2010 and chemicals giant Lubrizol in 2011.
It is also behind the comment made by Berkshire Hathaway vice chairman Charlie Munger at the shareholder meeting, "MidAmerican Energy may have an opportunity to deploy as much as $100 billion over the next 10 to 15 years at very reasonable rates." Much of that spending is likely to consist of capital expenditures, but the $100 billion estimate leaves room for strategic deals, and the figure came as one of the biggest surprises to Berkshire watchers at the shareholder meeting.
"That was far north of what I would have previously estimated," says Tom Lewandowski, an analyst with Edward Jones, adding, "Regulated returns are pretty attractive."
MidAmerican Energy's previously tried to cut large deals, offering $4.7 billion for Constellation Energy
On Tuesday, a search of companies by Bloomberg highlighted Deere
Even if Berkshire continues to make large equity investments such as his recent $10 billion stake in IBM
The issue of cash was on the minds of Berkshire shareholders at the annual meeting. Amid annual cheers for Berkshire and his value investing approach, analysts and investors still pushed for further clarity on Buffett's repurchasing of Berkshire Hathaway shares. During the town hall meeting, Whitney Tilson questioned whether Buffett should raise the valuation where he would consider buying back shares. Currently, Buffett says that he won't repurchase Berkshire shares if they trade for more than 1.1 times the company's book value. Currently, Berkshire has a price-to-book ratio of roughly 1.2.
"Berkshires shares have trailed the return on the S&P over the last few years, having a $30 billion cash position doesn't help," says Lewandowski of Edward Jones. Still, investments like Bank of America and crisis-time stakes in Goldman Sachs
-- Written by Antoine Gara from New York.