The industry stands at an inflection point regarding consolidation. But this time, it is less likely to retreat from more and larger combinations. What’s driving renewed interest in mergers and...
A New Vintage of Investor
Rothschild investment banker Roger Wood explains why those new infrastructure funds are hot on utilities.
He was quite literally the toast of last year’s EEI Finance conference. Using his bank’s diverse resources (Rothschild vineyards in France), he arranged an unforgettable wine tasting that was a big hit with utility executives.
And utility execs should raise a glass for another reason. Roger Wood, the head of Rothschild’s Power & Utilities Group in North America, is one of the few true white knights on Wall Street. Whereas many banks have developed businesses that can conflict with their utility clients’ interests, Wood says Rothschild’s bankers “live and die by providing long-term independent advice.”
British born and Oxford educated, and bearing a slight resemblance to Sean Connery’s James Bond, Wood in 2005 joined Rothschild, the legendary investment house that funded Wellington’s armies, the Gold Rush, and the Suez Canal, for starters. He previously was a banker with Citigroup and J.P. Morgan.
Based in New York for 10 years, he’s had extensive transaction experience in both Europe and the United States. One of his toughest deals, he recalls, was the forced sale in a difficult market environment of British Energy’s North American nuclear assets, in two separate transactions; Bruce Power to a Canadian consortium, and AmerGen to Exelon. More recently he has been spending time on both sides of the deal table with a new class of financial buyer, called Infrastructure Funds, which are making a play for the utilities industry.
What do utilities and regulators need to know, and should they embrace or spurn these new deals? Rothschild’s Wood gives us his view on the matter.
Fortnightly: From an infrastructure funds perspective, why do some investors want to invest in particular segments of the industry? What do they seek?
Wood: The theory from the infrastructure investors, which I’m sure you’ve heard, is that they have long-term liabilities (typically pension but sometimes insurance as well) and what they want is some long-term, stable, low-risk assets so they can make the classic matching of liabilities with assets. It’s a nice theory. It works especially well in the low-risk, regulated monopoly parts of the industry, but less well in the commodity-sensitive parts. But I think where the theory potentially falls down is the risk that investors are not getting the portfolio diversification which most people would say that they should be looking for. You either need to do lots and lots of deals, or you need to effectively underwrite and then syndicate down your position in order to end up with a smaller piece of the deal, if you are to get real diversification. Otherwise, there is a risk that you are taking a huge bet on a sector, even a particular company, and if it doesn’t work out, then your long-term liabilities are even less likely to be covered than they would have been if you were investing in regular financial securities.
The other issue, which I think is particularly topical at the moment,