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

Don't bet on it -- the purchase says more about Warren's friendships than it does about the state of American utilities.
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Wall Street analysts have been falling all over themselves in the wake of the announcement that

Warren Buffett's Berkshire Hathaway

(BRK.A) - Get Report

was joining forces with Berkshire board member

Walter Scott

and

MidAmerican Energy Holdings

(MEC) - Get Report

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) - Get Report

, 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.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.