Warren Buffett finally found his next crisis-era deal.
Berkshire Hathaway, which has stayed relatively quiet during the tumult of the coronavirus pandemic, broke its silence at the end of a holiday weekend in the US with its biggest acquisition in more than four years.
The agreement for Dominion Energy’s natural gas pipeline and storage assets signalled to the market that Mr Buffett, 89, is willing to pounce, despite his cautious tone in May about the pandemic, according to David Kass, a professor of finance at the University of Maryland’s Robert H Smith School of Business.
“He’s willing to make investments now, of a fairly sizeable amount,” Mr Kass said.
“It’s very positive that he’s sending a signal for the right deal at the right price, $10 billion (Dh36.7bn) or more, ‘We’re ready to go, we’re ready to invest’.”
Mr Buffett, who has grown Berkshire into a conglomerate valued at $434bn, built his reputation as an investor able to swoop in during volatile markets to strike unique and complicated deals in past crises.
After being stymied on the acquisition front during the recent bull market for stocks, Mr Buffett still was not striking any deals during the initial stages of the pandemic and even dumped his stakes in the big US airlines.
His inability to make a major acquisition recently came under scrutiny, with his critics arguing that Mr Buffett had lost his ability to pull off the game-changing transactions that helped vault Berkshire into the ranks of the most valuable US public companies.
Now, the deal to buy substantially all of Dominion Energy’s natural gas transmission and storage assets for $4bn, along with the assumption of $5.7bn in debt, shows that Mr Buffett is willing to put his money to work, Mr Kass said.
“We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business,” Mr Buffett, who is chief executive and chairman of Berkshire Hathaway, said on Sunday.
“I’m inspired to see that, given that he’s bearish, he’s still willing to make acquisitions where he thinks it makes sense and where it meets Berkshire’s hurdle points,” said Darren Pollock, a portfolio manager at Cheviot Value Management, which holds Berkshire shares.
Berkshire’s Class A shares, which are down 19 per cent this year, gained 2.5 per cent to $274,256 at 9.49am in New York on Monday. Dominion Energy dropped 4.7 per cent to $78.81.
Mr Buffett has considered Berkshire’s energy business one of the “lead dogs” of the conglomerate’s non-insurance operations alongside its railroad investments.
Berkshire’s purchase expands its stake in the sector, adding more infrastructure to handle natural gas to its already sprawling energy operations across states such as Nevada and Iowa. The company also struck the deal at a low point in the market.
Natural gas futures in the US dropped last month to their lowest point in 25 years and have recovered just slightly since then.
“This looks like confirmation that commodities [such as] energy are undervalued,” Bill Smead, chief investment officer at Smead Capital Management, which owns Berkshire shares, said.
“At the bottom, assets move from weak hands to strong hands.”
Berkshire is digging deeper into a business that has been facing increasing scrutiny amid the push for energy companies to shift away from fossil fuels. Dominion Energy on Sunday cited its target to reach net-zero emissions by 2050.
The deal also highlights the work of one of Mr Buffett’s deputies, Greg Abel, who led the energy business for years and is now chairman of Berkshire Hathaway Energy alongside his role as Berkshire’s vice chairman for all non-insurance businesses.
Mr Abel has gained a reputation as an important deal maker for Berkshire with the 2013 purchase of NV Energy and even the battle to buy Oncor Electric Delivery, which ultimately did not take place.
Mr Abel is viewed as a potential successor to Mr Buffett.
The Dominion deal is set to be Berkshire’s largest acquisition ranked by enterprise value since its purchase of Precision Castparts in 2016.
Still, Mr Buffett ended the first quarter with a record $137bn on hand and has been hankering for an “elephant-sized acquisition” to put a chunk of his cash pile to work. The Dominion agreement’s total enterprise value would account for about 7 per cent of that total.
“It’s not something that’s going to move the needle from a balance sheet standpoint, but it’ll produce several hundred million dollars a year in net income to Berkshire,” said Cheviot’s Mr Pollock.
“That’s no paltry sum. That adds up over time.”