By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the...
Do Utility Mergers Deliver?
Not in all cases, or for all stakeholders. Here’s why.
The past 10 years have seen more than 50 utility mergers in the United States. Punctuated by the recent National Grid/Keyspan and FPL/Constellation announcements, the industry appears at another inflection point in its march toward consolidation.
Given the cost and complexity of such mergers, these events indicate that the industry perceives substantial benefits from consolidating. But what is the track record, and does the regulatory and strategic landscape suggest these mergers are beneficial?
Utility mergers are rationalized based on growth, business scale or cost synergies, but an objective analysis of the impacts on utility customers, rates, management, employees, service quality, and financial performance has not been performed. Using mergers consummated to date, let us examine the evidence for the benefit of prospective merger partners, regulators, and other utility stakeholders.
While recent studies point to a mixed track record for corporate mergers from a shareholder perspective, we have taken a more holistic approach. Specifically, we have researched the effects of a group of six mergers on shareholders, employees, and customers over a period of five years since their respective merger closing dates.
Table 1 shows the six utility combinations selected for this assessment. This sample group, while far from comprehensive, is a representative cross-section ranging from a smaller scale roll-up to full-scale combinations. Each of these merged companies has had sufficient history to enable post-merger analysis with some degree of perspective, although these combinations ideally are evaluated over an even longer period.
Impacts on Shareholders
Figure 1 shows the change in total shareholder return for each company in the sample group for five years following the corporate combination, adjusted for the total return of the Dow Jones Utility Index as a whole. One take-away is apparent: Five of the six merged companies matched or beat industry returns during the two years immediately following the merger. The performance of the exception, Sierra Pacific Resources, was more a factor of regulatory exposure to Western power markets than direct impacts from the merger. Figure 1 also shows that after this two-year period, other industry- and company-specific events may have more influence over the stock than the merger. For example, Xcel Energy made a strong start in 2001 through early 2002, but soon was drawn into the merchant generation collapse through its ownership of NRG. Merging arguably created greater merchant exposure for New Century Energies, but it was merchant exposure, and not the merger per se, that was responsible for Xcel’s financial challenges.
Measured over the longer term, however, the success of these utility mergers has been mixed. Energy East has brought together several smaller utilities in the Northeast in a “roll-up” under one corporate umbrella. This intuitively appealing strategy has yet to provide positive returns in relation to the broader utilities market. Conversely, Exelon, Progress Energy, and AEP have outpaced the broader market since