The purchase of the combined gas and electric utilityMidAmerican Energy by Berkshire Hathaway Inc., one of the nation’slargest and most successful investment groups led by legendaryinvestment guru Warren Buffett, could focus increased financialinterest on the industry.

“This is very encouraging for the utility industry,” commentedDynegy CEO Chuck Watson during his own company’s earningsconference call last week. “This is clearly a savvy investor whohas chosen to invest in an area that probably 10 years ago hewouldn’t have considered. I think it speaks well for the utilityindustry.

“I think the multiples of utility stocks in general, maybe evenDynegy specifically, but certainly utility stocks in general, Ithink, are below market relative to others. I think this shows thathe not only understands the convergence business and the potentialfor those companies that distinguish themselves to continue togrow, but that there’s maybe a fundamental market play in theutility industry in general. I saw nothing but positives [in thepurchase] for the industry.”

Berkshire Hathaway, a holding company primarily involved in theproperty and casualty insurance businesses, jumped into the energysector last week by purchasing MidAmerican Energy Holdings Co. forover $2 billion. Overall, the total enterprise value of thetransaction is $9 billion.

After the completion of the transaction, expected by April of2000, MidAmerican will become a privately owned company withpublicly traded fixed-income securities.

Formerly known as CalEnergy, MidAmerican Energy Holdings is thecorporate parent of MidAmerican Energy Co., a utility with 653,000electric customers and 622,000 natural gas customers in a10,600-square-mile area from Sioux Falls, SD, to the Quad-Citiesareas of Iowa and Illinois. Earlier this year, the utility and theIllinois Chamber of Commerce formed the state’s largest energymarketing program for Illinois businesses and chamber members. Asthe Chamber’s exclusive energy provider, MidAmerican startedoffering electricity, gas and other energy services to a wide rangeof customers in Illinois this month. It is also the parent ofNorthern Electric & Gas Co., an electric and gas supplier toover two million customers in England. Overall, MidAmerican EnergyHoldings has 9,800 employees.

The board of directors for the Des Moines, IA-based companyapproved the acquisition Oct. 24. The purchase breaks down to$35.05/share and represents a 29% premium over MidAmerican’sclosing price on Oct. 29, but lower than its 52-week high of$36.06. The deal is subject to MidAmerican shareholder andregulatory approvals from FERC, the NRC, the Iowa Utilities Boardand the Illinois Commerce Commission.

Some analysts said the price was too low. “Simply put, thestock, having jumped 23% on Oct. 25, is only 5% from the dealprice,” Kyle Rudden, an analyst with J.P. Morgan said in a report.”Moreover, though additional upside (e.g. a higher price fromBerkshire, a competing bid, etc.) is perhaps possible, we don’texpect it would be significant enough to justify fundamental buyingat these levels.” Rudden also said the deal had a tremendous upsidebecause, assuming the deal closes in six months, it could offer a50% annualized return over the Oct. 25 close compared to the 30-50%return MidAmerican would earn if it stayed independent.

Ed Tirello, an analyst with Deutsche Banc Alex. Brown, said itwas a cheap deal, but a good one as well. “None of MidAmerican’senergy groups are performing at a high level. The entire group isdown, which has caused the stock price to go down. The offer gaveMidAmerican stockholders the chance to regain the value they hadbefore the stock’s value dropped. [The deal] was cheap, but therewas nothing else on the table to improve the value of the companyas effectively.”

Berkshire Hathaway, based in Omaha, NE, will invest $1.25billion in stock, giving it about a 75% interest in the company ona fully-diluted basis. Berkshire will also buy an $800 millionissue of non-transferable trust preferred stock. The otherinvestors, who in total will invest approximately $300 million, areWalter Scott, MidAmerican’s largest individual shareholder, andcertain Scott family interests, and David L. Sokol, the chairmanand CEO of MidAmerican.

“With no financing contingencies, this transaction shouldprovide an attractive price to shareholders without the time delayand uncertainty inherent in other potential options,” said Sokol.”This transaction represents an endorsement of MidAmerican by twoof the most respected and successful investors in the world. Itprovides better access to capital, an expected improvement incredit quality and association with a long-term investor who allowsmanagement to operate autonomously.”

Buffett, CEO of Berkshire Hathaway and one of the world’s bestknown investors, said a main reason for the purchase was the talentin MidAmerican’s leadership. “We buy good companies withoutstanding management and good growth potential at a fair price,and we’re willing to wait longer than some investors for thatpotential to be realized. This investment is right in our sweetspot. If I only had two draft picks out of American business,Walter Scott and David Sokol are the ones I would choose for thisindustry.”

Company headquarters will continue to be in Des Moines, IA, withthe office of the chairman and CEO remaining in Omaha, NE, to focuson strategic planning, mergers and acquisitions and globaldevelopment.

Gregory E. Abel, MidAmerican president said “No managementchanges are planned, no employee reductions will result from thetransaction and the company’s name will stay ‘MidAmerican’. It willbe business as usual, with advantages that did not exist before.”

John Norris

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