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Utility M&A: How Many Deals, and How Soon?
By opening the field to far-flung deals, PUHCA’s repeal changes the merger game.
Financing is a fundamental issue as well. While some deals likely will be fairly straightforward stock-for-stock transactions, the strong performance of utility stocks recently might complicate matters for would-be acquirers.
"From a bondholder's perspective, we'd prefer the stock-for-stock transactions," Leung says. "But a lot of fallen angels have improved their balance sheets, and stock prices have appreciated considerably. I wouldn't be surprised if there were some component of debt in the next phase of mergers."
If high price-to-earnings ratios force companies toward leveraged buyouts, credit ratings and capital costs could suffer. This is especially true in an environment of rising interest rates. As a result, rating agencies will be watching merger trends closely.
The real battle over utility mergers, however, will take place at state public utility commissions. "Regulators won't be shy about stopping mergers and acquisitions they don't like," Wenner says. Recent examples involved private-equity firms that sought to acquire Portland General Electric in Oregon and Unisource Energy in Tucson, Ariz. "The state commissions have said they don't want funds coming in to buy, hold and sell off a utility," Wenner says. "But those may be the exceptions; Lots of funds will be big buyers, and I don't see any reason that would stop."
However, PUCs seem certain to scrutinize any utility M&A transactions, whether the buyers are private-equity firms or other utilities. While federal authorities seem comfortable removing barriers to the formation of regional utilities, state regulators remain wary about the effects on consumers.
"Utilities that function in multiple states and regions are complicated for state regulators to oversee," says former CPUC Commissioner Wood. "Regulators in states with multi-jurisdictional utilities express a great deal of frustration in trying to penetrate the accounting to make sure costs aren't being shuffled around."
Such concerns undoubtedly will slow down any merger wave that PUHCA's repeal might have triggered. Nevertheless, the utility M&A landscape has changed in potentially dramatic ways, and companies' strategies and tactics are certain to change along with it. Utilities that figure out how to take advantage of those changes while protecting ratepayer interests seem likely to emerge as the leading energy and utility companies of the 21st century.