Saturday, November 28, 2015

A Look Back at British Columbia Power

British Columbia Power was a interesting story back in 1962. It was one of the biggest positions of the Buffett Partnership at 11% of total assets. It was a Canadian company going through an acrimonious court battle with the British Columbia government. At issue was the company's very existence.

The newly formed British Columbia government of WAC Bennett wanted to expropriate the assets of BCP, which was the largest electricity generator in BC at the time. The Bennett government wanted to control and expand hydro power generation in British Columbia by constructing new dams along the Peace River and eventually exporting the power to the US. To this end the government expropriated BC Electric which is BCP's wholly owned subsidiary. The government paid BCP $110M for BC Electric. And it promised BCP that in the event BCP ceases to be a going concern because of this action, it will pay a further $62M. By 1962 it was clear that BCP wanted more for its assets before it would dissolve. At 1962, the BC government was already in control of BC Electric for a year. And BCP was fighting the Bennett government in the courts for all that time. The BC Supreme court was due to render a verdict sometime in 1963. BCP had already received $110M in 1961 and distributed $89M of that to its shareholders in 1961. The company received the remainder of the $172M in 1962 but under protest. The BC Supreme court was to decide whether $172M was enough compensation, or whether it should be closer to the $225M BCP was asking. By 1962, the equity on the books was $95M. That works out to $20 per share — in this post all currency are Canadian dollars, which was equivalent to $0.925 USD back then. The 1962 high price price for BCP common shares was $20 58. In other words, the company was trading at book value without any money making assets. It simply had the half of BC Electric proceeds that it hadn't yet distributed plus the hope of additional compensation the court would award.

It is against this backdrop that Buffett bought his large position based on Charlie Munger's recommendation. The following is an excerpt from The Snowball by Alice Shroeder:

Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock —but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.

I don't think that description is totally accurate though. BCP was trading at around $19 USD but there was no guarantee the court would rule in its favour and even if it did no one knew exactly how much. But Munger, being a lawyer, probably had a hunch that the company would get a favourable ruling and bet heavily. In any case, there was no downside. The money for BC Electric was in the bank; so, BCP wasn't going to get BC Electric back.

In the end the court ruled that the expropriation was illegal and the two parties eventually settled on a $197M price. This is $25M more than the expropriation price. Each share would eventually get $25.50 or $22.20 USD before disollution.

I think this case shows merger arbitrage with minuscule risk. And how Buffett and especially Munger would bet big in such a situation. Buffett got a 15-20% annualized return on his investment and Munger did much better with leverage.


  1. interesting background on this deal; I had wondered about its mechanics ever since I read the Snowball. I believe the book also mentioned Munger borrowing $3 million to plow into this deal, but it could also be that I'm mistaken and that it was unrelated to this particular arbitrage.

  2. Hi Timberwolf, looks like a lot of people like this series of posts. Next I am going to talk about a BPL short position. stay tuned!

  3. I know I do; I have always been interested in the way Buffett operated in the early days but have never really gotten around to doing the research.