Business & Money

Deck: 
Experts debate whether KKR's leveraged buyout of UniSource Energy is right for the industry.
Fortnightly Magazine - February 2004
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Business & Money

Experts debate whether KKR's leveraged buyout of UniSource Energy is right for the industry.

"From a public policy standpoint, should a utility that provides a vital public good be owned by a private group that gains ownership by taking on a high degree of debt (risk)?"

Mark T. Williams, executive-in-residence at the Finance & Economics Department at Boston University, identifies the quintessential issue that will no doubt be heatedly debated in boardrooms and commissions as more utility CEOs are tempted to become private utilities through a leveraged buyout transaction.

And tempted they will be.

Morgan Stanley estimates that the top 10 largest private equity groups seeking to invest in the sector have a total buying power of $198 billion (see chart 1, p. 25). While this amount is for total investment in all business sectors, many experts say billions are being earmarked for utility industry investment even as significant amounts of private equity investment already have been spent (see chart 2, p. 25).

Moreover, Williams says, given that interest rates are currently at 40-year lows, and utility sector debt spreads over risk-free treasuries have declined in recent months makes highly leveraged transactions more attractive.

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