Analysis: Buffett utility deal may signal big push to invest cash

Wed Jun 5, 2013 2:40pm EDT
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By Nichola Groom

(Reuters) - MidAmerican Energy Holdings Co, a core part of Warren Buffett's sprawling business empire, is becoming a favorite way for the "Oracle of Omaha" to invest the billions of dollars of cash on Berkshire Hathaway Inc's (BRKa.N: Quote) balance sheet.

The unit's $5.6 billion acquisition of Nevada's NV Energy NVE.N, announced last week, vaulted MidAmerican to ninth place in terms of U.S. electric utility customers from fourteenth, according to data compiled by Reuters, and fits right into Buffett's strategy of owning businesses with large, predictable cash flows.

But some on Wall Street say there is another, less obvious reason for such a deal: The 82-year-old Buffett is beginning to tie up the nearly $50 billion of cash on Berkshire's balance sheet to assuage concerns about a leadership transition when he dies or becomes too infirm to run the conglomerate.

Though investors trust that Buffett will put an appropriate successor in place, they acknowledge that, as the world's most successful value investor, he is a special case.

Berkshire Vice Chairman Charles Munger last year said MidAmerican could deploy as much as $100 billion over the next 10 to 15 years.

"The energy sector looks to be a pathway for (Buffett) to invest a lot of money," said David Rolfe, chief investment officer of St. Louis-based Wedgewood Partners, which has about $300 million invested in Berkshire Hathaway stock. "There is a very good chance that 10 years from now it's the largest part of Berkshire, easily."

Including the NV Energy deal, which is the largest in the global energy and power sector so far this year, MidAmerican makes up only about 10 percent of Berkshire's pre-tax earnings, dwarfed by the company's vast insurance holdings. But that is expected to change.

"What (MidAmerican and railroad Burlington Northern Santa Fe) have done is guaranteed the cash flows get reinvested back into those businesses," said Morningstar analyst Greggory Warren. "It eliminates some of the risk to whoever succeeds him of having too much cash on the balance sheet and not enough good ideas."   Continued...

Berkshire Hathaway CEO Warren Buffett pauses during a bridge game in Omaha May 5, 2013 the day after company's annual meeting. REUTERS/Rick Wilking