Can consolidation create sustainable long-term value, or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
Building a Utility Roll-up Machine
How private-equity firms may consolidate the utilities industry.
attributable to the transaction, such as rate credits and commitments to future utility investments, generally are required. Financial investors, with reputations for highly leveraged capital structures and aggressive cost cutting, have a particularly high “trust hurdle” to overcome.
In the TXU transaction, leverage again has become an issue, and the acquirers are attempting to sidestep concerns by pointing out that none of the additional debt will be placed on TXU Delivery, the rate-regulated utility. Acquirers with a trust deficit generally must offer more tangible benefits than other acquirers to establish that a proposed transaction results in net benefits. Indeed the hurdle may get so high that it kills the deal. In contrast, utility management with a track record of sound utility operations, community responsibility, and financial prudence will help the financial acquirer to bridge the trust gap if regulators can be ensured that the utility management team will continue to be fully involved in decisions affecting operations and capital allocation.
Although yet to be completed, NorthWestern Corp.’s acquisition by the Australian fund Babcock and Brown Infrastructure provides another illustration of efforts to address the trust hurdle. Made wary by NorthWestern’s recent bankruptcy, the regulatory reception has not been warm. “The deal will receive severe scrutiny. [Babcock and Brown] is a company we know nothing about. … This is an attractive deal to shareholders, but it may not be the most attractive alternative for Montana,” noted Ted Schneider, a member of the Montana Public Service Commission. 3 Babcock and Brown has emphasized its commitment to long-term ownership, retention of NorthWestern’s employees and management, and its desire to provide capital for utility infrastructure additions. 4 Its CEO has met with employees, retirees and community leaders and has stressed his firm’s intentions as a good steward.
“We want NorthWestern Energy’s customers and regulators to be assured of our commitment to being a long-term investor. We understand the importance of maintaining infrastructure and ensuring that NorthWestern continues to provide safe, reliable electricity and natural gas service at reasonable prices.” 5
Bringing Management And Labor Together
No matter how polite the euphemism—“operating synergies,” “workforce reductions,” “terminations,” “pink slips,” or “firings”—state regulators will consider the impact on labor when determining whether a transaction furthers the public interest. 6 A high-performance company relies on its workforce for success, and even if labor is not legally a stakeholder in a merger proceeding, investors cannot afford to fumble their approach to labor.
In the late 2004 acquisition by AGL Resources Inc. (AGLR) of NUI Utilities, the New Jersey Board of Public Utilities observed:
While petitioners do anticipate the elimination of redundancies … petitioners will honor all existing NUI bargaining agreements. Petitioners also assert that employees will benefit from the merger due to AGLR’s financial strength and stability, particularly with respect to the employee pension plan and in the form of enhanced professional opportunities and training. 7
The case provides insights into managing labor issues during a utility merger.
• Job reductions should appear even-handed. AGLR explained that the elimination of redundant employees would be focused at the executive and management levels.