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Does Buffett's MidAmerican Maneuver Mean the Electricity Business is Sexy Again?

Christopher Edmonds

Wall Street analysts have been falling all over themselves in the wake of the announcement that Warren Buffett's Berkshire Hathaway (BRK.A) was joining forces with Berkshire board member Walter Scott and MidAmerican Energy Holdings (MEC) Chairman David Sokol in a bid to take the Iowa-based electric utility private.

Morning calls along the Street have been littered with utility analysts talking up the positive impact Buffett could have on the industry. Several firms, including Schroders and Donaldson, Lufkin & Jenrette have issued positive comments on the industry based on the news.

But while eager to characterize the deal as St. Warren blessing the undervalued utility sector, Wall Street's pitches miss the point: Buffett is not a sector investor, he is a company investor. And he wants to buy this company because of the principals involved. The deal is the result of a long-lasting relationship with Walter Scott, who is also MidAmerican's largest individual shareholder, and Scott's connection to Sokol. And the fact that all three hail from Omaha.

Nor should investors ignore the lessons of Buffett's spring purchase of a couple of real estate investment trusts, or REITs. While that led to a quick bounce in the downtrodden group, the rally quickly smoldered, and the sector now trades well below Buffett's March entry point. "Buffett's investment decisions draw attention," says Robert Hagstrom, portfolio manager of the (FOCTX)Legg Mason Focus Trust and author of the Warren Buffett Portfolio. "However, to stretch this deal into an endorsement of the entire sector shows a lack of understanding of Buffett's investment process."

Nor is Buffett endorsing the strategy of an industry traditionalist. Sokol was originally the CEO of CalEnergy, an independent power producer with projects spanning the globe, and the company's portfolio of assets reflects it. "Buffett bought an independent power producer, not a utility," says one buysider who holds a position in MidAmerican. "When push comes to shove, it's a real unique buyer buying a real unique company."

While most insiders agree it is difficult to stretch Buffett's purchase of MidAmerican into an endorsement for the sector, the fact that yet another electric utility has chosen to abandon the public markets for private capital may signal a trend. Buffett's deal comes on the heals of the buyout of TNP Enterprises (TNP), led by former Long Island Lighting Chief Executive William Catacosinos. And, while public investors seem disinterested in the sector, that opens the door for innovative transactions. "Utilities will continue to be a sector general investors have little interest in," says a fund manager specializing in the sector. "That may create some very interesting opportunities for leveraged buyouts."

Indeed, there were loud whispers at last week's Edison Electric Institute annual meeting of possible deals between utility executives and private investors. "Buffett's move may have smacked a couple of CEOs upside the head," the buysider says. "If Buffett has an interest in private ownership [of utilities] then it must be a decent idea."

Or at least that's the hope. "Our sector is so out of favor that any news is welcome," says one utility executive whose company once looked at acquiring MidAmerican. "Buffett's interest should at least improve the mood."

Improve the mood, maybe. But it's doubtful the dollars will follow.