This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
PGC $22.00 -0.81%
AAPL $125.46 0.75%
FB $86.15 0.41%
GOOG $524.11 0.50%
TSLA $267.15 2.00%

Markets

DOW 17,659.95 +63.60 0.36%
S&P 500 2,062.78 +5.14 0.25%
NASDAQ 4,975.9360 +17.4680 0.35%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs