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Warren Buffett's Elephant Gun Could Target Utilities Deals

"Clearly [utilities] is a sector he is ready, willing and able to make very large investments in," says Whitney Tilson, the founder of T2 Partners and the Tilson Mutual Funds. "I don't see anything in the current [stock] portfolio that Warren Buffet is likely to make a bid for," adds Tilson. Buffett had purchased increasing equity stakes in Burlington Northern shares on three occasions leading up to pulling the trigger on the acquisition.

PG&E (PCG), for example, with a market cap of $18.8 billion, would roughly be in line with the $22 billion sized-deal when assuming a premium, and it's in a sector already seeing consolidation as regulated merchant power businesses look for cost synergies to overcome falling natural gas prices and others look to pick up regulated customers.

MidAmerican Energy's previously tried to cut large deals, offering $4.7 billion for Constellation Energy (CEG) amid a broad market slump in September 2008. However, MidAmerican withdrew the bid in December after Constellation divested some nuclear businesses to Électricité de France for $4.5 billion.. Constellation Energy was eventually sold to Exelon (EXC), in a deal that received Department of Justice approval last December.

On Tuesday, a search of companies by Bloomberg highlighted Deere (DE), Henkel, Cummins (CMI) and Mosaic (MOS) as some companies that fit within Warren Buffett's stated M&A parameters and an elephant sized deal.

Even if Berkshire continues to make large equity investments such as his recent $10 billion stake in IBM (IBM) and a preferred stake in Bank of America (BAC) at its 2011 share price low, Berkshire hasn't cut enough deals like Burlington Northern and Lubrizol -- which didn't even top $10 billion -- to quell concerns that cash is burning a hole in the company's pocket.

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 (GS) and General Electric (GE) prove the wisdom in carrying a little spare cash. "I think stock repurchases make sense, but if you have volatility, distressed investments also could make sense," Lewandowski said.

For more on utilities M&A, see Fitch Ratings pick of 10 dividend rich, deal ready utility stocks and why Duke Energy's (DUK) mega utilities deal to buy Progress Energy (PGN) could still go dark.

For more on Berkshire Hathaway, see what Buffett knows about bank investing that you don't and how Wells Fargo may prove him right again.

-- Written by Antoine Gara from New York.
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