Warren Buffett has said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
It seems that’s what the Oracle of Omaha, the world’s second-richest man with an estimated net worth of $50 billion, did yet again when he purchased Baltimore’s Constellation Energy Group last week for $4.7 billion.
“He waits for these assets to become available,” said Justin Fuller, a Morningstar analyst who follows Buffett’s holding company, Berskhire Hathaway.
“This is something that you’ve got one shot in a lifetime to buy — these are assets you can’t replicate,” Fuller said.
When increasing concerns about Constellation’s financial stability spurred investor fears and caused the company’s stock price to plummet nearly 60 percent last week, Buffett swooped in with an offer. MidAmerican Energy Holdings, a subsidiary of Berkshire Hathaway, agreed to purchase Constellation for $26.50 per share. At the beginning of the year, Constellation stock was worth as much as $107.97 per share.
And with proper financial support, which MidAmerican can certainly provide, Constellation is worth “at least $88 per share,” said company analyst Paul Justice.
Like he did in the past with Coca-Cola, American Express and Gillette, it looks as if Buffett got an investment steal in Constellation, a Fortune 500 company with 2007 revenues of $21 billion.
“He’s been talking about expanding his utilities for a while,” Fuller said. “Now, he’s got some absolutely fantastic power-generating assets in the Northeast.”
Buffett’s decisiveness was no surprise to Lawrence Cunningham, a George Washington University law professor who wrote “The Essays of Warren Buffett: Lessons for Corporate America and Introductory Accounting.”
“This appears to be a textbook value investment — a business currently priced in the moody market considerably below its intrinsic value, and right in the center of Berkshire’s circle of competence,” Cunningham said.
After previous acquisitions, Berkshire Hathaway has tended to leave company operations in the hands of established leadership, Fuller said. That might not be the case with Constellation, though, as MidAmerican already has a utilities business infrastructure in place.
“But they might be fine to leave the redundancies in place, if they see that beneficial to business,” Fuller said.
In a statement released last week, Buffett said, “MidAmerican has been a wonderful steward of its energy assets, and the acquisition of Constellation Energy, when completed, will prove beneficial to all constituents.”
When Warren Buffett is involved, that’s a safe bet.
BETTING ON BUFFETT
With Warren Buffett’s purchase of Constellation Energy, MidAmerican Energy Holdings becomes the largest utility in North America.
Its North American subsidiaries include:
• CalEnergy Generation (Omaha, Neb.)
• Constellation Energy Group (Baltimore)
• HomeServices of America Inc. (Minneapolis, Minn.)
• Kern River Gas Transmission Co. (Salt Lake City, Utah)
• MidAmerican Energy Co. (Des Moines, Iowa)
• Northern Natural Gas Co. (Omaha, Neb.)
• PacifiCorp (Portland, Ore.)
