Call it the Gorat's Factor, since it may be considered pocket money that Warren Buffett spends at his favorite steakhouse in Omaha.
In 2002, a number of once fairly high-flying merchant power firms had their wings clipped by ratings agencies and investors who had lost confidence in their energy trading prowess. A number of firms, including Mirant, Dynegy, Reliant Resources and Williams saw their credit ratings decline, and their stock prices plummet. Mirant did eventually go into bankruptcy. Dynegy held on, barely. Reliant and Williams? Well, they turned to Warren Buffett and borrowed money that bought them some time.
Apparently, that is what Buffett has done for Constellation, lent it money to buy it some time. Last week Constellation told Warren Buffett ''thank you'' for the $1 billion he lent them in mid-September, but they were turning down his offer to buy the company and accepting an offer from the French firm EDF. It is interesting to note that it was the huge collateral calls on Constellation’s big power and gas and new international coal trading that got the company in trouble with investors.
In 2002, Buffett lent Tulsa-based Williams $900 million to get it through its crisis, and he attached a 30% interest charge to that 12-month loan. An interest rate of that size tends to focus the mind. Williams repaid Buffett the $900 million, plus $300 million in interest, in just over 11 months.
The $300 million that the 77 year-old billionaire Buffett reaped from his loan to Williams would certainly pay for quite a few T-bone steaks, hash browns and cherry cokes that Buffett always orders at his favorite restaurant, Gorat's. Located on Center Street, not from from downtown Omaha, one has the feeling Gorat's hasn't changed that much since Louis and Nettie Gorat opened it in 1944. The cashier at Gorat's acknowledges that the price for Buffett's favorite meal has been going up of late. It is now running at close to $40, not including the tip. Buffett always pays cash, she says.
Buffett will see another nice payday with the termination of the Constellation deal. The Baltimore company's board, knowing it was going to have to pay a lot to get out of its deal with Buffett, did so anyway. Indeed, on Wednesday, Constellation chief Mayo Shattuck confirmed that the company would pay MidAmerican the previously agreed-upon $175 million termination fee. It will pay Buffett back the $1 billion he put up in September, at 14% interest, over the next 12 months. It is going to pay MidAmerican “approximately $418 million in cash” for its troubles.
And Constellation is giving Buffett 20 million shares of common stock, equal to a 9.9% holding. At December 18’s closing price of almost $24/share, that is $480 million worth of stock. That should cover quite a few T-bone steaks and big cherry cokes.
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