Utility M&A: Buying Time

Buying Time

Slowly and cautiously, utilities are moving back into growth mode.

The air is buzzing with talk of mergers and acquisitions (M&A). It can be heard in the boardroom and on the trading floor. Bankers hear it, and they see their deal backlog beginning to grow. Fund managers hear it, as they hunt for the best buys in the market before strategic investors snatch them up. Financial advisers and lawyers hear it, too; their phones are ringing more than they have in years.

But is it for real? Is the buzz just a lot of talk, signifying nothing more than wishful thinking from Wall Street? Or is a wave of utility M&As truly on the way?

"There was a noticeable increase in comments about M&A in the June earnings conference calls," says Jim Hempstead, vice president and senior analyst with Moody's Investors Service in New York. "The primary rationale behind M&A is to pursue earnings growth through scale and scope, but impediments to that rationale exist."

Utility mergers are complicated, costly and difficult to justify-to ratepayers, shareholders, and regulators alike. Nevertheless, many of the fundamental drivers that favor M&A are moving into place. Debt costs are low; many utilities are in a strong cash position; and investors are beginning to apply pressure as they look for growth opportunities exceeding utilities' low organic growth rates.

These drivers, combined with the prevailing "back-to-basics" mindset among utility investors and regulators, are pushing the industry toward consolidation. Whether and when companies go along with that push depends on their ability to develop a business case that makes sense. And they seem to be in no hurry.