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Warren Buffett says be greedy when everyone else is fearful. So it is no surprise that his utility MidAmerican Energy swept in to buy NV Energy, a power provider in Nevada, for $10-billion (U.S.) on Wednesday amid a lean M&A market. But when looking at the purchase price, investors in NV Energy must wonder why its management did not bargain harder to match Mr. Buffett's avarice.
NV Energy's fit with MidAmerica is obvious. Mr. Buffett loves his regulated, steady, capital intensive infrastructure businesses. He acquired MidAmerica, based in Iowa, for $10-billion in 1999. Before NV, it operated two regulated utilities in the U.S. covering 10 states, two electricity distribution businesses in the UK and two US natural gas pipelines as well as a burgeoning renewable energy business.
The NV Energy acquisition resembles MidAmerica's deal for PacifiCorp exactly eight years ago. Mr. Buffett paid $9.4-billion for that utility. Its focus was the Pacific Northwest and the Rockies. That deal equated to a multiple of operating cash flow of 8.6 times, according to Capital IQ. The corresponding multiple for the NV Energy acquisition is slightly less. More concerning, the offer price of $23.75 per share is a 23 per cent premium to Wednesday's closing price. Just a month ago the stock closed at $21.63 – the deal price is only a 9 per cent premium to that. When Mr. Buffett bought Heinz this year, he paid 19 per cent more than the ketchup maker's all-time high. Such a premium here would imply a price of above $25 and the NV Energy deal, unlike Heinz, is an add-on with some synergies.
Utilities have traded down in the past month and it appears that this is another instance of Mr. Buffett's opportunism. But just because he wants to buy does not mean that NV Energy stockholders should sell at any price just because management agrees to the deal.