Can Investors Profit From Berkshire Hathaway Inc. (BRK.B)’s Purchase?

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Berkshire Hathaway Inc. (NYSE:BRK.B) recent buying spree looks set to continue with its purchase of Las Vegas-based power and natural gas utility NV Energy, Inc. (NYSE:NVE). Under the auspices of its Mid-American Energy subsidiary, Warren Buffett’s company has agreed to pay about $5.6 billion to acquire the utility company. This deal presents several obvious synergies for the two firms and suggests that Buffett maintains an interest in developing the sorts of clean, renewable energy sources that NV Energy already uses.

Berkshire Hathaway Inc.

This deal should pique investors’ interest as well. Berkshire’s generous offer price puts a substantial premium on NV Energy’s shares, and the deal continues to hold out the prospect of an arbitrage premium. However, this transaction is not expected to close for several months. In the interim, a number of ongoing shareholder-rights investigations could produce legal action that delays or even scuttles the deal. Before jumping into this situation, investors should review all of the pertinent facts.

NV Energy, Berkshire-Hathaway and the competition

Berkshire Hathaway Inc. (NYSE:BRK.B)’s Mid-American Energy is a small but crucial part of the holding company’s portfolio. Although the utility space is not known for cutthroat competition or fast-changing business models, it is no longer the static, heavily regulated sector of yesteryear. As such, it might be worthwhile to compare the two companies that have the most at stake in this merger with another promising utility that operates in the American Southwest: Southwest Gas Corporation (NYSE:SWX).

Berkshire Hathaway Inc. (NYSE:BRK.B) has an eye-popping market capitalization of over $282 billion. This compares to more down-to-earth valuations of $5.5 billion for NV Energy, Inc. (NYSE:NVE) and $2.2 billion for Southwest Gas. Meanwhile, NV and Southwest had respective 2012 gross revenue figures of $3 billion and $1.9 billion. This compares to total 2012 revenues of $168.2 billion for Berkshire and $11.5 billion for its Mid-American subsidiary. During the same time frame, NV managed to turn a profit of about $331 million. Southwest Gas Corporation (NYSE:SWX) eked out a final income tally of $135 million. Berkshire Hathaway Inc. (NYSE:BRK.B) and Mid-American were considerably more profitable: Buffett’s holding company reported 2012 earnings of about $16.5 billion. His subsidiary earned about $1.5 billion.

Like many American utilities, NV and Southwest both carry substantial amounts of leverage. Buffett’s target currently has about $250 million in cash to offset long-term obligations of about $5 billion. With $33 million in cash and nearly $1.3 billion in debt, Southwest is in even rougher shape. By comparison, Berkshire has just under $50 billion in cash and just over $63 billion in debt.

How the deal is structured

Under the terms of this transaction, Berkshire Hathaway Inc. (NYSE:BRK.B)’s Mid-American subsidiary will pay about $5.6 million in cash for NV Energy. According to the Wall Street Journal’s analysis of this transaction, its all-cash nature sets it apart from a slew of recent all-stock utility mergers. As part of the deal, Mid-American will pony up $23.75 per share and assume nearly $5 billion in short-term and long-term debt obligations. Although there is no stated completion date, it seems likely that the deal will close by the end of 2013. This timetable is subject to change.

The uncertainty that surrounds this transaction has sustained a small but potentially profitable arbitrage premium for NV’s investors. NV Energy, Inc. (NYSE:NVE)’s current share price of about $23.50 is about 1% lower than Mid-American’s offer.

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