123: Buffett Thinks Berkshire Hathaway Energy Is Worth 45% Less Today
Berkshire buys 100% of BHE. The implied purchase price is more than 45% below what it paid Greg Abel just two years ago.
The Last Piece of the Puzzle
Berkshire Hathaway bought the remaining portion of BHE — about 8% — that it didn’t own from the estate of the late Walter Scott, according to a BHE 8K filing on September 30. This comes after buying Greg Abel’s 1% stake in August 2022.
Here’s what we know:
Berkshire paid $2,867,280,394 for 4,424,494 shares of BHE in the form of $2,267,280,394 cash plus a $600,000,000 note. (It also repurchased $100mm of junior subordinated debt but that doesn’t factor into our analysis other than to adjust for the cash portion.)
Additionally, Berkshire will receive 1,601,258 shares of BHE in exchange for an equivalent value in shares of BRK.
As of the last 10Q filing in June, BHE had 75,627,913 shares outstanding. The Scott estate’s 6,025,752 shares amounted to an ownership of 7.968% of BHE.
Run the numbers (below) and you end up with a value that’s 45% lower today than two years ago. Yikes! (See #80 where I look at the Abel transaction in more detail.)
Of note, this would put the value of BHE at book value ($49.9 billion as of June 30, 2024) compared to 1.9x the $47.3 billion book value as of June 2022 with the Abel transaction.
A Wild(fire) Reduction in Value
There are a few ways in which we might reconcile this large drop in implied value.
Distributions: If BHE distributed something of value prior to the transaction. BHE owned the BYD stake which we know Buffett has been selling. It also had $3.3 billion in cash as of June 30. It’s possible that BHE distributed excess cash and this reduced the value of the remaining entity. We won’t know if this is the case until the next 10Q comes out in a month or so. But it seems very unlikely to be the primary driver, and BHE has never paid a dividend under Berkshire’s watch.
Liquidity discount: The Scott stake really only ever had one natural buyer in Berkshire Hathaway. It’s possible they received a lower price for the relative ease in selling quickly to Berkshire. And Berkshire can guarantee a closing prior to the end of the year, which might have been consideration if the Scott heirs anticipate higher tax rates in the future.
A permanent impairment of value: It seems highly likely that the value of BHE was impaired by the recent wildfires and regulatory/political fallout. PacifiCorp and other BHE subsidiaries operating in western states could face huge settlements and they could see their future profitability permanently impaired.
Here’s an exerpt from Buffett’s most recently annual letter to shareholders. It’s quite possible that PacifiCorp has entered “survival” territory and/or the regulatory environment is worsening as feared.
My guess is the bulk of the change in value occurred because of a reduction in the value of BHE coupled with a slight discount as noted above.
Either Greg Abel got one heck of a deal for Berkshire Hathaway or the value of his former domain is worth far less today than just two years ago.
Stay rational! —Adam
My only 2 cents would be that Buffett may have "grossed up" the payment of Abel's interest to allow him to cover capital gains tax. In the case of the Trust, there was probably minimal capital gains tax consequences since they received a stepped-up basis upon the death of Walter Scott.
I arrived at similar conclusions when I looked at the filing this morning. I think that there has been a severe permanent impairment of value of BHE in Buffett’s eyes. Given his longstanding relationship with Walter Scott, I’m sure that he tried hard to come up with a figure that was fair to Berkshire and the Scott family. The fact that he was willing to issue Berkshire shares is also revealing in terms of his view of Berkshire’s intrinsic value. I’m looking forward to the 10-Qs about six weeks from now!