Bankruptcy fight over Oncor to test Warren Buffett’s discipline

Paying extra is not the way Warren Buffett does business, an analyst said. (Reuters)
Updated 20 August 2017
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Bankruptcy fight over Oncor to test Warren Buffett’s discipline

NEW YORK: Warren Buffett takes pride in naming his price to buy a company, and not paying a nickel more. But the largest US natural gas distribution utility, an unyielding hedge fund, and a Delaware bankruptcy judge now present one of the biggest challenges to the billionaire’s legendary discipline.
The board of bankrupt Texas utility Energy Future Holdings will meet later on Sunday to decide whether to sell its crown jewel, power transmission company Oncor, to Buffett’s Berkshire Hathaway or accept an opposing bid from Sempra Energy, a person familiar with the confidential deliberations said on condition of anonymity.
The rival bid for Oncor was disclosed on Friday by Energy Future’s biggest creditor, billionaire Paul Singer’s hedge fund Elliott Management Corp. The identity of the bidder was not publicly announced, but Bloomberg News first reported on Saturday that Sempra was the mystery bidder, citing anonymous sources.
Berkshire Hathaway Energy, Buffett’s energy unit, has offered $9 billion in cash for Oncor, while the rival bid is for $9.3 billion, a lawyer for Elliott said on Friday.
The gap is pocket change for Berkshire, but Buffett pledged last Wednesday not to raise his offer.
“Paying extra is not the way he does business,” said Jim Shanahan, a senior analyst at Edward Jones & Co. with a “buy” rating on Berkshire. “He is willing to be patient and wait for opportunities. That’s what analysts expect, and that’s what investors expect.”
Berkshire did not respond to requests for comment, while Sempra and Elliott declined to comment.
Berkshire said on Friday that its bid had won support from key stakeholders, including the staff of the Public Utility Commission of Texas, the regulator that has to approve the sale of Oncor. The commission’s executive director, Brian Lloyd, has also praised Berkshire’s bid.
Berkshire has told the regulator it will accept “ringfencing” on its acquisition of Oncor, restricting its ability to extract cash from the company or add more debt to it. It is unclear whether Sempra could offer the same assurances.
“Berkshire Hathaway Energy has offered a positive, simple, straightforward deal that benefits Oncor and its customers,” Oncor CEO Bob Shapard said in a statement on Saturday.
Even if regulatory concerns trump price considerations, and Berkshire’s bid for Oncor prevails on Sunday over that of Sempra, a San Diego-based utility, the sale has to be approved on Monday by US bankruptcy judge Christopher Sontchi in Wilmington, Delaware.
Elliott has said it opposes the sale to Berkshire because it believes it undervalues Oncor, and has argued it owns enough of Energy Future’s debt to veto the deal. Elliott has also been trying to put together its own bid for $9.3 billion to buy Oncor.
Buffett is trying to end the two-year lull since announcing his last major acquisition, a $32.1 billion takeover of aircraft parts maker Precision Castparts Corp.
Complicating Buffett’s hunt for bargains are soaring stock market valuations and competition from private equity firms with a lot of funds to spend, as well as from companies with anemic earnings growth that are turning to acquisitions for a recovery in their fortunes.


Ericsson swings to profit as savings kick in; shares jump

Updated 45 min 47 sec ago
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Ericsson swings to profit as savings kick in; shares jump

  • The Swedish mobile telecom gear maker has met an industry-wide downturn and mounting losses by sweeping cost cuts
  • Bolstering investor optimism are expectations that Ericsson is on the cusp of a new cycle of network upgrades

STOCKHOLM: Mobile telecom equipment maker Ericsson unexpectedly swung to a modest operating profit in the second quarter, boosted by growing sales in North America and said it was increasingly confident of meeting its longer-term targets.
The Swedish mobile telecom gear maker has met an industry-wide downturn and mounting losses by sweeping cost cuts, clearing out most of its top management and setting a strategy to focus on profitability over growth.
It had been in the red since the third quarter of 2016 and its return to profit sent its shares up 10 percent by 0816 GMT. “A trend of good execution (is) starting to emerge,” UBS analysts said of the latest results.
Bolstering investor optimism are expectations that Ericsson is on the cusp of a new cycle of network upgrades as demand for next-generation 5G gear kicks in later this year or early in 2019, starting in the United States.
Its shares have gained more than 36 percent in the year to date, buoyed by progress toward meeting its 2020 financial targets and hopes for a 5G-led industry growth cycle.
Marking its second consecutive quarter of substantial progress toward hitting its 2020 financial goals, the Swedish firm reported an operating profit of 0.2 billion crowns ($23 million), excluding restructuring charges of 2.0 billion crowns.
The operating profit compared to a 0.5 billion loss in the year earlier quarter. Analysts, on average, had forecast an 0.1 billion loss for the second quarter in a Reuters poll.
“We have good market traction in Networks, with a sales growth of 2 percent, particularly in North America where all major operators are preparing for 5G,” CEO Borje Ekholm said in a statement.
Networks, which accounts for two-thirds of Ericsson sales, rose 2 percent, year on year, buoyed by 15 percent growth in North America, Ericsson’s largest market. But they fell around 5 percent in South and Southeast Asia, North East Asia and the Middle East and Africa. Europe grew just 1 percent.
Ericsson appears to be benefiting from rising competition among the four top US carriers, which are all racing to be the first to deliver 5G in dozens of American cities. 5G has become a test of US technology leadership in the country’s growing stand-off with China over trade and national security.
Overall, Ericsson’s net sales dipped 1 percent in the second quarter compared to a year ago, reflecting the bottoming out of sharp declines for the mobile equipment industry since 4G sales peaked in 2015 and the expectation of a return to growth in 2020.
Ericsson Chief Financial Officer Carl Mellander said the company was focused on meeting its 2020 profitability targets but warned that quarterly results may still be up and down.
The CFO said that while the first commercial use of 5G would kick off later this year, the business was largely being driven by North America. “But material volumes... we maintain that will be in 2020,” he cautioned.
Ericsson, once the world’s biggest supplier of mobile communications gear, is facing falling spending by telecom operators, weakness in formerly fast-growing emerging markets and stiff competition from bigger telecom equipment players Huawei of China and Nokia of Finland.
The company said it had recently finished an annual cost-cutting program that saved more than 10 billion crowns, which would increasingly result in higher earnings.
Its second quarter gross margin, excluding restructuring charges, was 36.7 percent, versus 35.9 in the first quarter, driven mainly by cost reductions across its business divisions and the ramp-up in sales of its flagship 5G-ready radio gear.
The company has pledged to deliver a gross margin of 37-39 percent and an operating margin of at least 10 percent by 2020 and better than 12 percent heading into the next decade.