Buffett’s ‘Big Mistake’ Winds Up in Bankruptcy Court

Nobody was very surprised on Tuesday when the ailing electric company, Energy Future Holdings Corp., filed for bankruptcy. The firm, backed by private equity, which distinctly owns that it is the largest ever leveraged buyout, has currently been negotiating with creditors for a while and it was just a matter of time before they filed.

Even though they have spent quite a few months in drawn out legal negotiations with their creditors, the bankruptcy ensnared a number of big-time investors. Warren Buffett would have been one of them, except he sold his stake at a humongous loss last year. The Oracle of Omaha speaks about this in this year’s annual letter to shareholders, where he says:

“Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake.

“Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million. Next time I’ll call Charlie.”

The company Energy Future Holdings Corp. became private in 2007 by a number of different private equity investors, including TPG Capital, Goldman Sachs Capital Partners and KKR & Co. They paid $32 billion for the then named TXU Corp., and took upon $13 billion worth of company debt. The buyout was expected to be a play on gas industry growth, but the company’s profits fell right along with natural gas prices.

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