Wisconsin Energy Corp. (WEC) became the latest utility to seek growth through consolidation with a $5.7 billion offer for Integrys Energy Group Inc. (TEG), a deal that will almost double its customer base.
Wisconsin Energy, that state’s largest utility, will pay 1.128 shares and $18.58 in cash for each share of fellow power and gas company Integrys. The price represents a 17 percent premium to Integrys’s June 20 closing price, the companies said today in a statement. The deal also promised the first dividend increase for Integrys shareholders in five years, driven in part by new utility spending.
The drilling boom that has created a surplus of cheap natural gas has depressed power prices and underscored the appeal of regulated utilities that deliver steady income and strong dividends. Investors such as Warren Buffett and utilities such as Exelon Corp. (EXC) have turned to consolidation to boost growth.
“It’s rate base growth,” Wisconsin Energy Chairman and Chief Executive Officer Gale Klappa said today on a conference call when asked about the reason for the takeover. “Cash will be reinvested in the business. It’s very much needed.”
Today’s deal is the largest U.S. utility purchase announced this year behind Chicago-based Exelon’s $6.8 billion cash offer for Pepco Holdings Inc. (POM), owner of Washington’s electric utility. Louisiana utility owner Cleco Corp. (CNL) said today it has been approached by third parties and that Goldman Sachs & Co. and Tudor, Pickering, Holt & Co. have been retained as financial advisers.
Buffett’s Berkshire Hathaway Inc. (BRK/B) added Nevada utility NV Energy to its portfolio in December.
“We’ve had a lot of utility mergers for slightly different reasons,” Kit Konolige, a New York-based analyst for BGC Partners LP, said today in an interview. “There are significant operating and financial efficiencies that you can get from combining somewhat smaller companies into a larger one.” Konolige, who owns no shares, rates Wisconsin Energy at hold.
Wisconsin Energy, which is based in Milwaukee, said consolidation will increase profit the first full year and will raise dividends for shareholders of Integrys. Spending to expand its utility rate base, and ultimately profit, will double to $1.4 billion a year from $700 million a year, according to slides posted for an investor call.
“Integrys needs capital and Wisconsin Energy has capital,” David Parker, a Tampa, Florida-based analyst for Robert W. Baird & Co. said today in a telephone interview. “Wisconsin Energy had a very big capex program that’s been winding down. People were wondering, what do you do next?”
Wisconsin Energy shareholders will be assured higher cash flow as the company takes over projects planned by Integrys, said Parker, who rates Integrys at buy and Wisconsin Energy at hold. He owns shares in neither company.
“It’s a great deal for Integrys shareholders,” said Charles Fishman, a St. Louis-based analyst for Morningstar Inc., who valued Integrys at $54 a share. “It’s a real healthy premium and they’re getting shares in a very solid company.”
The yield on 10-year U.S. treasury notes has fallen almost 12 basis points, or 0.12 percent, so far this quarter to 2.6 percent, according to data compiled by Bloomberg. Yield on Integrys shares is 1.3 percentage points higher.
Wisconsin Energy has increased its dividend 21 percent over the past five years. Integrys hasn’t raised its dividend in that period.
Integrys’s holdings include Upper Midwest utilities including Chicago’s gas distributor, Peoples Gas. The combined company, WEC Energy Group, will take a controlling stake in American Transmission Co., a high-voltage operator typically allowed higher returns than its utility owners.
WEC Energy will have 4.3 million gas and electric customers in Wisconsin, Illinois, Michigan and Minnesota, including those of Peoples Gas, a Chicago utility. The value of the transaction will be $9.1 billion including assumed debt.
Integrys also said today it is in the “late stages” of divesting its unregulated retail-marketing unit, Integrys Energy Services. The business has performed poorly, Fishman said.
The deal is expected to close in about 12 months after regulatory approvals, the companies said.
Integrys has missed analysts’ per-share profit expectations in four of the past eight quarters, according to data compiled by Bloomberg. Wisconsin Energy’s earnings per share have exceeded the estimates for 18 consecutive quarters. Integrys shareholders will own about 28 percent of WEC Energy.
Klappa will be chairman and CEO of the combined company. Integrys chairman and CEO Charlie Schrock will retire upon closing of the deal.
“We see very sufficient rate base growth,” Klappa said. “No additional equity. We did not base this deal on synergies.”
The purchase will increase profit in the first full year after closing. Earnings per share will rise 5 percent to 7 percent annually over the long-term.
Barclays Plc (BARC) and Skadden, Arps, Slate Meagher and Flom LLP advised Wisconsin Energy. Lazard Ltd., Cravath, Swaine & Moore LLP and Foley & Lardner LLP advised Integrys.
Wisconsin Energy fell 3.5 percent to $45.27 at the close in New York, its biggest one-day drop since August 2011. It has risen 10 percent this year. Integrys surged 12 percent to $68.35.
Exelon, the largest operator of U.S. nuclear-power plants, agreed to buy Pepco for $6.8 billion in cash in April. UIL Holdings Corp. (UIL) has bid $1.86 billion for city-owned Philadelphia Gas Works. The Laclede Group Inc. (LG) is buying Alabama Gas Corp. from Energen Corp. (EGN) for $1.34 billion.
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