Elliott Management Challenges Berkshire for Oncor

When wide-moat-rated

No sooner had we uttered those words than there were rumblings that Paul Singer, with his hedge fund firm, Elliott Management, the largest creditor of the bankrupt EFH, was exploring his own bid for Oncor. That offer, which was disclosed late on July 10 and values the Texas utility transmission firm at $18.5 billion, was around $300 million higher than Berkshire Hathaway Energy's bid and would lead to a higher payout for EFH's debtholders. Elliott's proposal calls for a complex conversion of debt to equity, as well as additional funding from an outside equity partner to help finance the deal.

In that regard, we think Berkshire--which had $96.5 billion in cash and equivalents at the end of the first quarter, and has not only shown willingness to invest heavily in generation and transmission assets but has also not required BHE to pay a dividend to the parent company--is in a better position to get approval from the Texas regulators, which have scuttled past deals for Oncor due to concerns about board independence, ring-fencing, and parent leverage.

That said, Singer still has a fair amount of leverage in the bankruptcy court, given his firm's large stakes in EFH's two major debt classes. He has, however, noted that he would support a deal with Berkshire or a third party if those bids exceeded the value proposed by his firm. As a result, we expect this move on Singer's part to lower the probability of BHE's offer closing, but still view it as greater than 50%.

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