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Sempra Bid Tops Buffett and Singer in Race for Energy Future Sempra Bid Tops Buffett and Singer in Race for Energy Future
(about 11 hours later)
Sempra Energy, the California-based energy company, said early Monday that it has agreed to buy Energy Future Holdings for about $9.45 billion in cash, seeking to win a battle for the bankrupt power giant that so far has been contested by the billionaires Warren E. Buffett and Paul E. Singer. A month and a half ago, Warren E. Buffett unveiled a $9 billion takeover bid for Energy Future Holdings, setting up a battle with a fellow billionaire, Paul E. Singer, over the bankrupt Texas utility operator.
Sempra’s bid marks yet another twist in the fate of Energy Future, which was acquired by private equity firms in 2007 for a record-setting $45 billion — but quickly ran into trouble under a huge debt load. Energy Future filed for bankruptcy in 2014. More often than not, a deal with the market cachet of Mr. Buffett is as good as clinched. But the offer stirred up the interest of another potential suitor, which quietly spent weeks putting together its own rival bid.
Until the emergence of Sempra, ownership of Energy Future and its valuable Oncor subsidiary appeared to be likely to go to either Mr. Buffett’s Berkshire Hathaway, which bid $9 billion for it, or Mr. Singer’s hedge fund, Elliott Management, which is its biggest creditor and has opposed Berkshire’s offer. Elliott has been trying to put together a takeover bid of its own. On Monday, that bidder, Sempra Energy of California, emerged as the winner.
Last week, the hedge fund appeared to have found a way to stymie Berkshire’s bid by acquiring a particular class of Energy Future’s debt that effectively let it veto Mr. Buffett’s offer. Berkshire had said that it wouldn’t raise its bid and was prepared to walk away. With its $9.45 billion takeover bid for Energy Future, Sempra appears to have gained a utility that has tried unsuccessfully for years to sell itself. Should its proposal win approval from Texas regulators and a bankruptcy court judge, Sempra will gain control of Energy Future’s prized Oncor subsidiary.
But in a court proceeding on Friday in the Texas bankruptcy court overseeing Energy Future’s case, a lawyer for Elliott mentioned the presence of a then-unnamed utility operator that could pay $9.3 billion for Energy Future. Not only has Sempra struck its biggest acquisition ever, but it even bested perhaps the most celebrated deal maker that corporate America has ever produced.
That turned out to be Sempra, which is based in San Diego and provides power to 32 million customers. Sempra’s bid is off to a promising start. Berkshire said on Monday that it had withdrawn its bid. And Mr. Singer’s activist hedge fund, Elliott Management, which had opposed Mr. Buffett’s offer as too low, threw its support behind the new suitor.
A spokesman for Elliott said in a statement that the hedge fund would back Sempra’s offer, arguing that the latest offer “provides substantially greater recoveries to all creditors of Energy Future than the proposed Berkshire transaction.” Sempra represents Energy Future’s latest hope for emerging from a decade of turmoil and uncertainty. In 2007, Energy Future — then known as TXU — sold itself to a group of private equity firms for a record-setting $45 billion, at the height of the leveraged buyout boom.
Sempra said that it planned to finance its bid for Energy Future with a combination of debt, newly issued shares and outside investment. The energy company said that it had financing commitments from RBC Capital Markets and Morgan Stanley. But its enormous debt load dragged the company’s fortunes down almost immediately, and its backers eventually wrote off their investment. Energy Future finally filed for bankruptcy in 2014, and it has spent the last three years searching for a way out of Chapter 11 protection.
“With its strong management team and long, distinguished history as Texas’ leading electric provider, Oncor is an excellent strategic fit for our portfolio of utility and energy infrastructure businesses,” Debra L. Reed, Sempra’s chairman and chief executive, said in a statement. That quest had hit several roadblocks. Previous takeover bids for Energy Future by NextEra and by the Hunt Family ran aground amid opposition by the Public Utility Commission of Texas, the state’s energy regulatory agency.
Mr. Buffett’s offer, announced on July 7, seemed more promising. Berkshire possesses one of the most sterling reputations in all of corporate America, and it had bet on investors’ exhaustion from a yearslong bankruptcy case.
But Elliott, a veteran of many fights in Chapter 11 bankruptcy cases, quickly declared Berkshire’s bid insufficient. The hedge fund, which had already purchased nearly $3 billion worth of Energy Future debt to become the company’s biggest creditor, began working on its own takeover bid, which it estimated would be worth $9.3 billion.
It was during that time that the hedge fund first heard from Sempra, according to people with knowledge of the process, who requested anonymity to discuss confidential negotiations. Elliott had been searching for potential backers and interviewing both financial institutions and other utility operators as potential partners.
But Sempra, which had watched Energy Future’s bankruptcy case with interest over the years, wasn’t interested in merely being a partner in someone else’s bid.
Instead, the company continued to work quietly with its own advisers, seeking to assemble a bid in secret and avoiding tipping off Berkshire or other potential suitors. By the beginning of August, Sempra was working in earnest to beat Mr. Buffett.
Through Elliott’s fund-raising efforts, Sempra knew the minimum that it would have to bid: $9.3 billion.
Making such a big takeover offer was unusual for Sempra, which is based in San Diego and has 32 million customers. The company, which was created in 1998 from the merger of two Southern California utilities, has tended to invest in projects rather than buy counterparts outright.
The opportunity to buy Oncor, which has almost 10 million customers, proved too enticing to pass up.
“With its strong management team and long, distinguished history as Texas’ leading electric provider, Oncor is an excellent strategic fit for our portfolio of utility and energy infrastructure businesses,” Debra L. Reed, Sempra’s chairman and chief executive, said in a statement on Monday.
Sempra devised a two-pronged strategy aimed at assuaging both Texas power regulators and Elliott and other creditors, according to one of the people with knowledge of the process. In conversations with the public commission, Sempra committed to the same humble approach that Berkshire did, agreeing to exactly the same 44 conditions that Mr. Buffett’s team had.
That meant ensuring that Oncor’s financial health would be protected regardless of any drama at its parent company’s level.
And Sempra also negotiated with Energy Future to win its approval, while ensuring that Elliott and other potentially recalcitrant creditors would come on board.
The campaign to please creditors worked.
“Elliott is supportive of the proposed Sempra transaction, which provides substantially greater recoveries to all creditors of Energy Future than the proposed Berkshire transaction,” an Elliott spokesman said in an emailed statement.
According to terms disclosed on Monday, Sempra will finance its bid with a combination of debt, newly issued shares and outside investment. The energy company said that it had financing commitments from RBC Capital Markets and Morgan Stanley.
Sempra largely succeeded in keeping its efforts out of public view, with executives hoping to keep their company out of the news until at least after market close on Friday. Media reports identified the machinations of an unnamed third party only late last week, when a lawyer for Elliott mentioned the matter in a bankruptcy court hearing.
By the time Sempra’s name formally emerged as the new bidder, the California utility had all but finished its offer. Energy Future’s board then met on Sunday to approve the new bid — leaving Berkshire to lament a missed deal opportunity, even if it is set to receive a $270 million breakup fee for its now-dead deal.