Warren Buffett hates to get into a fight. Paul Singer lives for it.
Now, the two billionaires have crossed paths in the pursuit of a prized Texas utility. Buffett’s Berkshire Hathaway has hammered out a deal for Oncor Electric Delivery that could put an end to the decade’s largest bankruptcy. Singer’s hedge fund, Elliott Management, stands in the way, having employed an over-my-dead-body approach to the terms of Berkshire’s $18 billion bid.
The clash has left Buffett in a spot he prefers to avoid. The 86-year-old, who has wielded friendly guile to cobble together signature acquisitions, is now facing the choice of sweetening the deal to please a hedge fund, picking a fight or walking away.
But Singer wields a big stick. His fund is now the largest creditor to Oncor’s bankrupt parent, amassing $2.9 billion of Energy Future Holdings debt in recent months, giving it firepower in its attempt to torpedo a deal that it feels doesn’t sufficiently cover those debts. And Elliott’s famously litigious army is primed should Buffett want to plunge ahead with his offer.
“Whether Berkshire Hathaway is willing to kick in more money, I haven’t got a clue,” Oncor Chief Executive Officer Bob Shapard said in an interview. “Will Berkshire just hold their ground and kind of make Elliott prove that they can come up with a higher bid or will they negotiate something?”
Berkshire didn’t respond to requests for comment. Elliott declined to comment.
The sale of Oncor would be the last step to end the three-year bankruptcy stint of parent Energy Future, formerly known as TXU Corp., the end result of a record leveraged buyout orchestrated by KKR, TPG Capital and Goldman Sachs Capital Partners.
Berkshire’s proposed deal requires the blessing of the bankruptcy court. Elliott has presented the outline of an offer that’s worth $300 million more than Buffett’s. Any increase in deal price directly benefits the junior-most bonds, which are largely held by Elliott, according to Shapard.
Buffett has walked away from bids that have faced resistance. This year, Berkshire and 3G Capital agreed to each put up $15 billion to back Kraft Heinz’s offer for Unilever, only on the premise that it was a “friendly” deal, Buffett said in May during his annual meeting. When Unilever claimed the bid undervalued the company, the billionaire and his partners stopped the pursuit.
Still, his genial reputation notwithstanding, he can sometimes cause a fuss. In 2011, Berkshire sought to break up a deal, making a $3.25 billion unsolicited offer for Transatlantic Holdings, which had agreed to be purchased by another reinsurer. He noted in a 2016 letter that certain hostile offers are justified.
“There are lots of examples of Warren Buffett doing things differently from the way he describes himself,” said Meyer Shields, an analyst with Keefe, Bruyette & Woods. “He does what he can to make money for himself and for his shareholders.”
Elliott, on the other hand, has consistently injected itself into some of the most contentious bankruptcy battles of the last few years, ranging from defunct telecommunications company Nortel Networks to casino operator Caesars Entertainment and coal producer Peabody Energy.
The stakes are once again high for Singer’s firm in the Oncor deal. The distressed credit has already left many prominent hedge funds nursing losses.
Singer’s firm started buying up Energy Future debt last fall after hiring Jeff Rosenbaum from York Capital Management. At the time, York was one of the larger investors in Energy Future debt, a trade spearheaded by Rosenbaum.
When Texas regulators struck down a bid from NextEra Energy, it caused a panicked selloff that led to firms like York and Marc Lasry’s Avenue Capital taking a big hit. Elliott jumped in to buy the securities being jettisoned by the other funds, and grabbed major pieces of Energy Future’s debt on their way down — the junior-most notes lost about 50 cents, falling to 30 cents on the dollar toward the end of March.
But even at the lower prices, Elliott could stand to lose big under Berkshire’s proposal, recovering as little as 24 percent on the debt. And that figure could be significantly dented if Berkshire also pays some other fees.
Elliott instead says it can piece together a deal that would leave the debt holders much better positioned, including converting some debt into an equity stake to avoid a washout on the holdings.
Elliott faces a series of obstacles before it can challenge Buffett’s bid. A critical one is that the deal needs regulatory approval, a process that Berkshire has well underway.
Regulators may have little appetite for a New York hedge fund to take control of a utility that serves 10 million customers, especially after being left scarred by the private-equity buyout that sent the company barreling into bankruptcy.
Elliott has indicated that it plans a bid together with other creditors while bringing in new money for the deal from other sources.
Some doubt whether Singer truly has the desire to bid for Oncor and run the utility since hedge funds don’t typically want to own companies.
“I suspect Buffett knows this as well,” said Eileen Appelbaum, a senior economist for the Center for Economic & Policy Research in Washington. “Buffett can call Singer’s bluff. Or he can decide that Singer’s demand is an inconsequential annoyance and agree to raise his offer.”
Either way, the two suitors would subject Oncor to different ownership styles depending on who wins. Berkshire has a reputation for staying at arm’s length from its businesses, while Elliott’s more aggressive style seeks to keep management on its toes, Oncor’s Shapard said.
“Elliott is active, engaged,” he said. “Berkshire kind of takes more of a long-term focus — they’re much more relaxed.”
For Buffett, the impending impasse marks yet another attempt to tackle Energy Future.
In 2007, he purchased about $2 billion of TXU bonds that he later called one of his biggest investing blunders. He sold the debt for $259 million, according to a 2014 letter. In 2015, he sought to buy Oncor, but was outbid by NextEra.
Those setbacks could make him less inclined to walk away after having knocked repeatedly on the door.
“You don’t make $40 billion by being Mr. Rogers or by being one of the Muppets,” Alice Schroeder, a Buffett biographer, said in a 2012 Bloomberg documentary. “Warren takes no prisoners when it comes to a negotiation. He uses every bit of leverage that he can.”