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Big-Time Mergers? Not So Fast, My Friend...


Whole-company deals may not take off with PUHCA repeal.
Fortnightly Magazine - October 2005

One simple line in the recent Energy Policy Act sets the stage for broader geographical ownership by current utilities and easier ownership from outside industries.

Readers know very well that one line calls for the repeal of the depression-era Public Utility Holding Company Act, more commonly referred to as PUHCA. With PUHCA repeal, a major feature of the recent act, many pundits have stated that a wave of mergers and acquisition activity is now imminent.

The last 12 months have seen four major utility deals announced (see Table 1) . All four have had similar pricing ratios, with multiples of 8x-11x recurring earnings before interest, taxes, depreciation, and amortization and 1.5x-2.1x book values. If we truly see a group of energy acquirers step off the sidelines and a wave of new markets entrants, logic would seem to indicate that pricing ratios will rise in the face of more competitive bidding situations.

Critics of PUHCA repeal have warned that energy companies will squander capital and put reliability at risk in the quest for higher growth. Other critics warn that financial players will leverage up holding companies and put their financial health at risk. Critics also point to Enron and capital squandered in the gas-fired merchant power buildout of recent years.

Some of these arguments hold water, but most are unfounded. Utility mergers are still a local game, and the removal of PUHCA barriers does not diminish that fact. Successful acquirers still have to deal with possibly thorny state regulators.

State regulators recently scuttled two deals. In March of this year, the Oregon Public Utility Commission rejected Texas Pacific Group's bid for Portland General Electric Co. Regulators in Arizona nixed Saguaro Utility Group LP's bid to acquire UniSource Energy Corp. Both Saguaro and Texas Pacific—private equity funds with very deep pockets—were attracted to steady cash flow streams and could afford to invest in troubled or under-performing companies. Local regulators saw carpet baggers who would suck the utilities dry and then sell them off at a later date, never concerning themselves with customers.

Back in 2000, Texas-New Mexico Power (TNP) went private through a leveraged transaction, only to be resold to PNM Resources in 2004. Actual realized electric rates dropped for consumers during the period. Even though concerns with its deregulated affiliates kept TNP on various ratings watch lists, it emerged from private ownership largely unscathed. However, Arizona and Oregon state regulators seem largely to have ignored the TNP example.

Other Players

Private equity will not be a major player in utility acquisitions for the next few years, but what about other financial players? Berkshire Hathaway already has an existing utility vehicle in MidAmerican Energy Holdings, and therefore a track record with regulators that bodes well for its recent announcement to acquire PacifiCorp from Scottish Power. Its well-known