The fate of a giant Texas power company that has spent nearly a decade in financial distress lies in a potential battle between two billionaires.

On one side is Warren Buffett, who has agreed to pay $US9 billion ($11.8 billion) in cash for the utility operator, Energy Future Holdings. On the other is Paul Singer, the hedge fund mogul whose firm is the biggest creditor of Energy Future – and is exploring making its own takeover bid for the company, which has spent more than three years in bankruptcy proceedings.

A fight between the two would serve as the latest source of tumult for a company mired in financial and legal problems. And although Buffett is perhaps the most celebrated dealmaker in the world, Singer's hedge fund, and perhaps Texas power regulators, threaten to stymie his latest takeover bid.

At the centre of the brewing conflict is Energy Future, whose Oncor subsidiary is the biggest utility in Texas, with 10 million customers.

Money sinkhole

Yet it is best known as a sinkhole for investor money, with the three firms that bought it having written off their entire stakes in the enterprise and creditors still squabbling over how to reorganise its finances.

The company – previously known as TXU – was acquired in 2007 for $US45 billion in the largest leveraged buyout on record, at the heady peak of the private equity boom in the years before the financial crisis.

But what was essentially a debt-heavy bet on high natural gas prices began to falter quickly amid the onset of the crisis and the collapse of natural gas prices. Energy Future soon became an ominous reminder of private equity's excess, and the company's troubles eventually evaporated billions of investor dollars in value.

Among those investors was Buffett, whose Berkshire Hathaway had bought $US2 billion worth of Energy Future bonds, only to eventually sell those holdings at an $US873 million loss. Buffett later lamented to shareholders, "That was a big mistake."

Yet four years later, Berkshire Hathaway seeks to buy Energy Future outright, in a bid to expand its growing energy empire.

Steady returns

Oncor is meant to augment Berkshire Hathaway Energy, whose collection of utilities delivers power to 11.6 million customers across the Midwest and the West, as well as in Britain and Canada. Berkshire first bought control of what was then MidAmerican Energy in 2000.

It has since become an assembly of utilities, gas pipelines and renewable energy assets like solar and wind generators. Its profits accounted for roughly 10 per cent of Berkshire's $US24 billion in net income last year.

Buffett has pointed to the energy division as a business that generates steady, although not blockbuster, returns on capital. Utilities tend to perform well even in recessions, he wrote in his February letter to investors, and can draw earnings from a variety of sources that reduce the power of any single regulator.

Under the terms of the transaction, announced Friday, Oncor's chief executive, Robert Shapard, would become the business' executive chairman. The utility's general counsel, Allen Nye, would become its chief executive.

The deal would value the equity of Oncor, in which Energy Future owns an 80 per cent stake, at $US11.25 billion.

Sterling reputation

Buffett may be betting he will succeed because of two factors: Berkshire's sterling reputation and investors' sheer exhaustion from the yearslong Chapter 11 case.

While the Public Utility Commission of Texas had blocked previous bids for Oncor – from NextEra and from the Hunt family, a prominent player in the state's energy industry – analysts said Berkshire stood a good chance of swaying regulators to allow Friday's proposal.

Potentially standing in the way is Singer's Elliott Management, a hard-nosed hedge fund with experience battling for control of bankrupt companies.

Since last fall, Elliott has acquired much of Energy Future's debt. As of May, the hedge fund claimed to hold nearly $US2.9 billion of it.

Elliott has complained for some time about Energy Future's efforts to reorganise its finances, and in May it sued the utility company to pressure it into seeking alternative ways to restructure its debts.

One possibility Elliott favours: letting the hedge fund convert its debt holdings into equity, giving the investment firm a path to taking control.

While some of the debt the hedge fund and other creditors own would be paid back in full through the Berkshire deal, certain bonds – that Elliott also owns – would not be.

Wasting time

In its lawsuit filed in May, Elliott argued  Energy Future was wasting time and money on reorganisation plans that were unlikely to succeed.

"Now in their fourth year (six years considering their pre-bankruptcy efforts), the debtors have already explored and exhausted numerous options for exit, including a sale, and face further protracted proceedings with creditor recoveries rapidly diminishing daily," Elliott wrote in its lawsuit.

Elliott had opposed the NextEra bid that was blocked last week – which was worth more than Berkshire's offer.

Now the hedge fund is considering ways to counter Buffett's proposal, according to a person briefed on the matter. Elliott has begun preliminary consultations with prospective partners and sources of financing.

Elliott is also counting on the fact that the Berkshire proposal must be approved by the bankruptcy court judge overseeing Energy Future's reorganisation.

Still, it is not clear whether the hedge fund would ultimately proceed with its own bid.