OMAHA, Neb. Striking the second biggest deal of his career and making a major move in the energy industry, billionaire investor Warren Buffett agreed Tuesday to pay $5.1 billion in cash to acquire Western states electric utility PacifiCorp.
Only a $16 billion stock purchase of reinsurance giant General Re in 1998 outranks the latest buy for Buffett's investment vehicle, Berkshire Hathaway Inc., which holds a majority interest in PacifiCorp's buyer, Iowa-based MidAmerican Energy Holdings Co.
"The energy sector has long interested us, and this is the right fit," Buffett said.
MidAmerican will purchase Portland-based PacifiCorp from ScottishPower PLC, which acquired the utility in 1999. In addition to the cash payment, MidAmerican will assume $4.3 billion in PacifiCorp debt and preferred stock.
The transaction, the third major acquisition in the U.S. energy industry in the past year, is expected to close in 2006. "It's going to be one of the bigger energy companies in the country," said Tim Winter, an analyst at A.G. Edwards & Sons.
Berkshire Hathaway's Class A shares rose $2,010, or 2.4 percent, to $85,500 in late Tuesday trading on the New York Stock Exchange. ScottishPower shares rose 6.3 percent to close at 469.75 pence ($8.59) on the London Stock Exchange.
MidAmerican, based in Des Moines, Iowa, said the deal will create an energy holding company serving approximately 3 million electric and natural gas customers in 10 states and would have 6.6 million customers worldwide.
PacifiCorp will continue to be based in Portland and will retain its name. It also will continue operating as Pacific Power in Washington, Oregon, Northern California and Wyoming, and as Utah Power in Utah and Idaho.
The combined MidAmerican-PacifiCorp will have assets of more than $32 billion, including $25.3 billion in the United States. MidAmerican will have approximately $10 billion in annual revenues internationally, including $8.5 billion from the United States, the company said.
The deal follows Chicago-based Exelon Corp.'s December announcement that it would acquire Newark, N.J.-based Public Service Enterprise Group Inc. for $12 billion in stock, creating the country's biggest utility. On May 9, Charlotte, N.C.-based Duke Energy said it had agreed to buy Cincinnati-based Cinergy Corp. in a stock deal worth $9 billion.
More deals on horizon?
Deregulation in the 1990s fueled a series of utility mergers and acquisitions, then activity slowed. But Winter said more deals could be coming, particularly as foreign firms sell pieces of U.S. energy companies they have found less profitable than they had hoped.
ScottishPower, for example, may not have been getting the return it wanted from PacifiCorp and put it up for sale to please stockholders, Winter said. ScottishPower Chief Executive Ian Russell said in a news release that the company intends to return about $4.5 billion of the proceeds from the sale to shareholders.
Buffett is known for buying companies and holding on to them for long-term returns.
Berkshire first bought into MidAmerican Energy in 2000 for $1.24 billion, acquiring about 76 percent of the company. It has increased its stake to 80.5 percent, investing a total of about $3.3 billion.
The remaining 19.5 percent of MidAmerican is owned by Buffett partners David Sokol, chairman and CEO of MidAmerican; Greg Abel, president of MidAmerican; and Walter Scott, a longtime friend of Buffett's who is on Berkshire's board.
Buffett has called Sokol, Abel and MidAmerican a key part of Berkshire, which also owns or has holdings in a wide range of businesses, including insurance, soft drink, candy, furniture, restaurant and carpet firms.
Local Angle
PacifiCorp provides 1.6 million customers with electricity in the Western United States. It operates as Pacific Power in Oregon, Washington, Wyoming and California, and as Utah Power in Utah and Idaho.
PacifiCorp operates Merwin, Yale and Swift hydroelectric dams on the North Fork of the Lewis River.
The company is in the process of relicensing the facilities with the Federal Energy Regulatory Commission, and has committed to spending millions to restore salmon and steelhead to the upper river, plus improve parks along its reservoirs.
Visit http://www.powermarketers.com/index.shtml for excellent coverage on your energy news front.