Atmos Energy Corp. and United Cities Gas Co. have announced an agreement to merge in a share-for-share exchange of common stock.
Atmos distributes natural gas to about 673,000 customers...
For small to midsize utilities, the costs and burdens of being a stand-alone investor-owned utility merit considering the alternatives.
A pressing question for many utilities-particularly small to midsize utilities-is whether to remain a standalone publicly owned company at their current form and size. Do the benefits outweigh the costs?
Being a public company is, despite its many benefits, costly in several respects. The most obvious benefit is the (usually) ready access to equity funds for growth. A traded equity currency for use in strategic transactions also is important. The lowest cost of equity is obtained from the public markets. Nevertheless, the costs and burdens of public ownership and the accompanying regulation continue to rise.
Consider the actual costs of being a public company: preparation of periodic regulatory filings and reporting; financial and legal staff to prepare these filings and monitor compliance; filing fees; an investor relations department; annual meetings and reports; and related costs, such as director and officer (D&O) insurance.
With the enactment of the Sarbanes-Oxley Act and recent increased scrutiny, these costs-particularly D&O insurance-have only escalated (see Figure 1).
More to the point, the personal exposure, financial or otherwise, of the CEO, CFO, and other officers has increased significantly. Any member of a public company board of directors has to have the same concerns. Increased regulatory and public scrutiny will help curb many of the abuses seen in the go-go years, but unfortunately, everyone gets caught in this dragnet and pays the costs just the same.
A publicly owned company faces the difficulty of striking a balance between what a CEO believes to be the right strategic course and what the investing public believes is best. The public capital market serves a major role in instilling strategic discipline and keeping management focused on maintaining and building shareholder value. However, recent history would suggest that the investing public, including major institutional investors, is not always more astute than managers.
Management of a public company cannot ignore the equity research community. Analysts are now playing to a highly skeptical audience, and they will have to err on the side of criticality and more in-depth analysis. As a result, it will become harder to attract and retain equity research coverage for companies with smaller public equity floats and investor interest, leading to more and more research orphans.
Lastly, but no less importantly, actions of the major credit rating agencies have a much more significant impact on a utility's public share price. As a result, price/earnings ratios are highly correlated positively to credit ratings. Larger, more diverse utilities will have an implied safety and stability premium over smaller utilities.
Merge, Sell, or Go Private?
Does it make sense to be a public company today? The question specifically applies to the more than 50 small and midize utilities (market capitalization of $200 million to $2 billion), with limited future investment needs and an appropriate, stable capital structure. For these utilities, the benefits of being a standalone public company may not measure up to the increasing costs and burdens.
In these cases, the most likely alternative