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.
management and regulators closer to creative regulatory solutions, such as performance-based rates that allow the acquirer to capture synergies from consolidation. Reducing the risks that worry regulators (and other stakeholders like environmentalists) increases an acquirer’s credibility and speeds regulatory approvals, allowing faster growth. Resolving competing interests builds trust equity, and that means giving up less value to demonstrate a net benefit from a proposed acquisition. The TXU deal has made headlines because the acquirers and TXU’s management have been innovative in gaining environmentalists as allies rather than opponents.
The bankers courting C. John Wilder and TXU Corp. are self-aware. They know what they don’t know about running a utility. KKR’s Henry Kravis said that while working with Wilder, the acquirers “have developed a new vision … of how we can turn TXU into a more innovative, customer-centric, environmentally friendly company, and we plan to work with management to implement it.” Institutional Investor magazine has bestowed multiple honors on Wilder, including naming him the best CEO in the electric power sector in 2004 and 2005. He has completed a turnaround plan for TXU ahead of schedule, the company’s generating units perform at high capacity factors, and TXU is well on its way toward its goal of “industry-leading, customer-focused financial and operational performance.”
Venture capitalists follow the maxim that you don’t buy the technology, you buy the management team. Wilder has not committed to stay on. He avoids conflicts that way. But it seems clear that bankers are backing C. John Wilder and his management team as much as TXU. They are nurturing a seedling that will someday grow into a utility roll-up machine.
1. In the Matter of the Petition of NUI Utilities, Inc. (d/b/a Elizabethtown Gas Co.) and AGL Resources, Inc. for Authority Under N.J.S.A. 48:2-51.1 and N.J.S.A. 48:3-10 of a Change in Ownership and Control, Docket No. GM04070721 (Nov. 17, 2004) (“NUI Utilities”) at 14-15.
2. In the Matter of the Reorganization of UniSource Energy Corporation, Arizona Corporation Commission, Decision No. 67454 (Jan. 4, 2005).
3. “NorthWestern Explains Why it Took BBI Offer,” Electric Utility Week (May 8, 2006) at 12.
5. NorthWestern Corp. Press Release; NorthWestern Energy, Babcock & Brown Infrastructure Receive Transaction Approval From Federal Energy Regulatory Commission (Oct. 19, 2006).
6. See e.g., N.J.S.A. 48:2-51.1, which provides in relevant part, “In considering a request for approval of an acquisition of control, the board shall evaluate the impact of the acquisition on competition, on the rates of ratepayers affected by the acquisition of control, on the employees of the affected public utility or utilities, and on the provision of safe and adequate utility service at just and reasonable rates.”
7. NUI Utilities at 17.
8. Electric Utility Week, Nov. 20, 2006 at 2.