IOUs considering co-op acquisitions are finding fertile territory for growth.
Attorney Kevin T. Williams provides advisory services to utilities and investors, with a focus on cooperative acquisitions. Williams previously held executive and legal positions with Old Dominion Electric Cooperative and CMS Energy. Additional background on co-op acquisitions is available here.
When utility executives consider the options for growing their business within a "back-to-basics" framework, naturally they consider acquiring other utilities. However, the relatively high price/earnings ratios of most investor-owned utilities (IOUs) today means bargains can be hard to find. Also, with PUCs disallowing the recovery of acquisition premiums, and mergers of equals facing daunting "social issues," IOU mergers don't look as attractive as they once did. Thus, many companies are beginning to consider prospects that lie outside the typical utility-merger model to bridge the "growth gap" between Wall Street expectations and the "back to basics" model that the Street has imposed (see, for example, "A Starvation Diet for Utility Earnings Growth," Public Utilities Fortnightly, June 2004, p. 18).
In the course of this analysis, the idea of acquiring electric cooperatives inevitably arises. In the past, conventional wisdom held that such acquisitions were either impossible or not worth the trouble. This "wisdom," however, is ill-founded. Cooperatives can be and have been acquired, and upon examining the fundamentals, utility executives usually sit up and take notice. In fact, at this moment some IOUs are scrutinizing the territory of electric cooperatives with acquisitions in mind.