Exclusive - Elliott explores bid to challenge Buffett's Oncor deal: sources

By Jessica DiNapoli

(Reuters) - Elliott Management Corp, the largest creditor of the bankrupt parent of Oncor Electric Delivery Co, is exploring putting together a bid for the Texas power transmission company that would top Warren Buffett's $9 billion all-cash deal, people familiar with the matter said on Friday.

If Elliott, the hedge fund run by billionaire Paul Singer, proceeds with such a bid, it would be a rare challenge to Buffett, who avoids auctions for companies and has told his investors he does not like to participate in bidding wars.

Elliott would seek to convert its debt in the company to equity, as well as raise new equity financing for its bid, the sources said. As with Buffett's deal, a bankruptcy judge would have to approve Elliott's alternative plan.

Elliott's stance illustrates the complexities of acquiring companies whose debt is trading at distressed levels. SoftBank Group Corp Chief Executive Masayoshi Son, another famed dealmaker, saw the $14 billion merger between the Japanese company's satellite startup OneWeb and debt-laden peer Intelsat SA collapse last month after many of the latter's creditors refused to back the deal. [nL3N1IY4Q1]

The hedge fund believes it can put together a higher offer than the deal announced on Friday by Buffett's Berkshire Hathaway Inc , which has a total value of $18.1 billion including debt, the people said.

In May, Elliott held about $2.9 billion of Oncor parent Energy Future Holdings' roughly $10 billion debt load, with its investment concentrated in a layer of unsecured payment-in-kind notes trading at deeply distressed levels. The hedge fund amassed its position in Energy Future's debt from October to May, according to court papers.

Elliott is considering pursuing an alternate deal for Energy Future because it thinks Berkshire's offer undervalues the Oncor business, seen as the bankrupt company's crown jewel asset, the people said.

Elliott may also seek to use its rights as a creditor to Energy Future to block the sale of the company to Berkshire in bankruptcy court, according to the sources.

The sources asked not to be identified because the deliberations are confidential. Elliott declined to comment, while Oncor and Berkshire Hathaway did not immediately respond to requests for comment.

Berkshire's pursuit of Energy Future comes after two other suitors, most recently NextEra Energy , failed to win approval from regulators. [nL4N1JY1Y4]

The unsecured payment-in-kind notes Elliott holds fell in value by close to 30 percent in secondary trading on Friday on news of the Berkshire deal, to about 29.5 cents on the dollar, according to Thomson Reuters data, indicating investor concerns over these notes' recovery prospects.

When NextEra clinched a deal last year to buy Energy Future and Oncor in a deal worth $18.4 billion, including debt, Berkshire also submitted a bid at the time, the sources said. Berkshire's bid then valued Energy Future at more than its deal on Friday does, the sources added.

Elliott has developed a reputation on Wall Street as an aggressive debt investor, having engaged in a fierce battle with Argentina over its sovereign debt that spanned more than a decade.

Elliott filed a lawsuit in May against Energy Future asking for it to consider debt reorganization alternatives, including a plan that would involve converting Elliott's significant debt holdings in the company to equity, eventually putting Oncor under the hedge fund's control.

(Reporting by Jessica DiNapoli in New York; additional reporting by Tom Hals in Wilmington, Delaware and Jonathan Stempel in New York; Editing by Meredith Mazzilli and Bill Rigby)