(Reuters Breakingviews) - Paul Singer is testing Warren Buffett's adherence to his own investing wisdom. The hedge-fund chief's Elliott Management has cobbled a proposal to extract Texas electricity provider Energy Future Holdings from bankruptcy, challenging Berkshire Hathaway's $9 billion deal. Even if the rival plan is a stretch, the Oracle of Omaha famously eschews competitive processes.
Berkshire Hathaway Energy cleverly wooed regulators, who had been unhappy with two previous overtures from NextEra Energy and Hunt Consolidated. Buffett's enterprise intends to wind up with Energy Future's coveted 80 percent stake in transmission utility Oncor. The cash offer is less than what NextEra put forward. Even so, Buffett is providing a seamless exit path from bankruptcy into a fortified parent company that promises to reinvest all profit back into the business.
Elliott's proposal values the companies holding the Oncor stake slightly higher, at $9.3 billion excluding debt, but at this stage it's squishier. Part of the deal includes swapping debt for equity. It also needs additional backers. What's more, it may cost $270 million to terminate the Buffett plan. These factors could make it harder for Elliott to persuade a judge that its idea is superior.
That won't necessarily stop Elliott from exerting leverage. For one thing, the hedge fund surely knows how squeamish Buffett is about combative negotiations. As he reminded Berkshire Hathaway shareholders just a few years ago: "We don't participate in auctions." He then emphasized the point by invoking country music: "When the phone don't ring, you'll know it's me."
Singer, perhaps best known for waging a successful 15-year battle over Argentine bond payments, owns nearly $1.2 billion of Energy Future subordinated debt. Elliott reckons these bonds will be worth just 24 cents on the dollar under Buffett's offer. As the largest holder of notes in one of the biggest creditor groups forced to take a discount, at a minimum it will have a big voice in court.
If nothing else, this fight will give Buffett one more reason to loathe hedge funds, which he dressed down again in his most recent annual missive. For now, he has the Public Utility Commission of Texas expressing eagerness to move forward with his offer. With Oncor clearly in his sights, the question is just how much Buffett is willing to bend one of his golden rules.