When Berkshire Hathaway Inc. (NYSE:BRK.B) makes an acquisition, the global investment community takes notice. Recently, Berkshire Hathaway’s MidAmerican Energy announced that it would acquire NV Energy, Inc. (NYSE:NVE) for around $23.75 per share in cash, with a total transaction value of around $10 billion, including debt. Since 2009, NV Energy has experienced a consistent rise in its stock price, from only $8.20 to around $23.50 per share at the time of writing. Let’s dig deeper to see why MidAmerican Energy likes NV Energy.
Growing operating income and operating cash flow
NV Energy, Inc. (NYSE:NVE) seems to operate quite efficiently, with consistent increasing operating income. While the revenue did not move much, from $2.79 billion in 2003 to nearly $3 billion in 2012, the operating income advanced significantly, from $132 million to $785 million during the same period. The operating cash flow also followed the same trend, rising more than three times from $269 million to $875 million in the past three years. With the stable business, NV Energy could comfortably employ quite some debt in its operations. As of March 2013, it had $3.54 billion in equity, $251 million in cash and more than $5 billion in debt.
A reasonable valuation
With around $10 billion in total enterprise value, NV Energy, Inc. (NYSE:NVE) is worth around 8.5 times EV/EBITDA. Compared to its peers such as Avista Corp (NYSE:AVA) and Sempra Energy (NYSE:SRE), it seems like NV Energy got a fair deal. At $26.70 per share, Avista is worth around $1.6 billion. Avista got the similar EV multiple to NV Energy, Inc. (NYSE:NVE), at 8.6. Avista is the retail electric and retail natural gas services for more than 318,000 residential customers, and around 40,000 commercial customers in the U.S. Income investors might be quite familiar with the company due to its consistently increasing dividends. Since 2003, Avista’s dividend has increased from $0.49 per share to $1.16 per share. At the current trading price, Avista Corp (NYSE:AVA) pays a juicy dividend at 4.4% to investors. At the end of March, the company received the approval from the Idaho Public Utilities Commission on the natural gas base rates increase of 4.9%, or $3.1 million. According to the company, the agreement set a 50% equity layer and a ROE at 9.8%. The increase in base retail rates would be in effect from the beginning of 2015.
Sempra Energy (NYSE:SRE) is also a consistently increasing dividend paying company. For the past ten years, Sempra has increased its dividend payment from $1 per share in 2003 to $2.40 per share in 2012. Sempra is trading at $81.30 per share, with the total market cap of around $19.8 billion. The market seems to value Sempra the most expensive, at 11.4 times EV/EBITDA. It offers shareholders lower dividend yield than Avista, at 3.2%. Sempra U.S. Gas & Power is one of the most active companies involving in solar projects. The first phase of Mesquite Solar is generating emission-free electricity for around 56,000 homes. With the potential of up to 700 MW in capacity, Mesquite Solar could be considered the biggest photovoltaic solar power plant in North America.
Interestingly, NV Energy, Inc. (NYSE:NVE) is not a company that income investors would like the best, with the dividend payment starting from 2007. The dividend has increased from $0.16 per share in 2007 to $0.64 per share in 2012. However, its dividend yield is juicier than Sempra, at 3.8%.
My Foolish take
By integrating NV Energy into MidAmerican, MidAmerican could enhance the service to the Nevada area with the focus on customer satisfaction. On the other hand, NV Energy could get access to huge financial resources and tap in the renewable energy segment, in which MidAmerican has a lot of expertise. To conclude, Warren Buffett commented:
This is a great fit for Berkshire Hathaway Inc. (NYSE:BRK.B), and we are pleased to make a long-term investment in Nevada’s economy. Through MidAmerican, we have found in NV Energy a great company with similar values, outstanding assets, and a superb management team.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Closer Look at the NV Energy Merger Deal originally appeared on Fool.com and is written by Anh HOANG.
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