Elliott Management starts a bidding war with Berkshire for the Oncor Electric Delivery

Elliott Management, Oncor’s largest creditor, has unveiled its bid of $18.5 billion topping Berkshire’s bid of $18.1 billion. The hedge fund has let it be known that it would support Berkshire’s or any third party’s bid, if they were to exceed its own.

In a game of upmanship, Elliott Management Corp unveiled its strategy to best Berkshire Hathaway Inc’s bid for bankrupt, Oncor Electric Delivery Co, with a bid worth $18.5 billion, including debt.

Going by the document published on its website, Elliott was unhappy with Berkshire’s efforts to recover dues from some creditors under its $18.1 billion deal that was announced by Warren Buffett on Friday.

Elliott believes, as a result of its acquisition, it could provide a much higher payout to debtholders.

Elliott’s proposal to acquire Energy Future Holdings Corp calls for a complex conversion of its debt to equity and for an outside equity partner to help finance the deal.

The offer from Elliott, which has more than $32 billion under its management, is a rare challenge to Buffett, who incidentally had told investors that he does not like to participate in bidding wars. But even without a competing bid, Buffett’s bid faces strong headwinds without Elliott supporting it.

“We are extremely concerned that introducing a transaction with Berkshire at the current time will significantly undercut and potentially limit Elliott’s ability to provide a portion of the financing necessary to achieve the higher and otherwise superior transaction Elliott has proposed,” said Elliott in a letter to the board of Energy Future dated July 5 and released on Monday.

However, if the bankruptcy judge were to allow Berkshire’s bid to go through, it would ensure that a costly end to Energy Future’s bankruptcy. The company’s power generation and retail electricity business were earlier separated from Oncor.

Paul Singer run Elliott, disclosed on Monday, that it would keep in place a corporate “ringfencing” structure that would prevent debt from being added to Oncor, or too much cash being paid out as dividends.

Regulators in Oncor’s home state – Texas, have demanded such a structure. The lack of such a structure was the reason Florida utility NextEra Energy Inc’s $18.7 billion deal fell through earlier this year.

According to an adviser to Energy Future, Berkshire Hathaway has already reached an agreement on a consensual approval process with regulators.

While Elliott declined to comment, Berkshire was not immediately available for comment.

Oncor did not immediately comment on Elliott’s letter.

Elliott’s disclosures came after Energy Future filed its new bankruptcy plan of reorganization on Friday wherein it proposed repaying the unsecured debt that Elliott holds at 18 cents on the dollar.

If Elliott succeeds in its bid for Energy Future, being the largest creditor, its unsecured debt would have a recovery of 50 cents on the dollar, said sources familiar with the matter at hand who went on to add, that Elliott has secure and unsecured debts worth $2.9 billion.

As per the sources, Elliott built up its position in the company after Texas regulators rejected NextEra’s offer earlier this year which caused bond prices to crash.

Elliott is known for being aggressive, if its twelve year old battle over sovereign debt in Argentina is of any clue. It may pursue litigation to block Berkshire’s bid, said the sources.

The hedge fund has stated, it would support Berkshire’s or any third party’s bid, if they were to exceed its own.

“We fear that the Berkshire transaction does not provide such value,” said Elliott in the letter.

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