Utilities Bring Sexy Back as Deals Heat Up: Real M&A

Even utilities are drawing attention in this year’s merger boom.

Electricity providers have attracted almost $50 billion in takeover offers this quarter, the most since the beginning of 2011, according to data compiled by Bloomberg. Cleco Corp. (CNL), a $3.5 billion regulated power provider, this week became the latest utility to receive interest. That’s after Wisconsin Energy Corp. announced on June 23 that it was buying Integrys Energy Group Inc., and Exelon Corp. agreed in April to acquire Pepco Holdings Inc. in the industry’s biggest deal in three years.

Near-zero interest rates and low power prices caused by a glut in natural gas are increasing the appeal of regulated utility assets, which offer stable cash flow and returns. Cleco, which has one of the industry’s highest returns on invested capital, could make sense for CenterPoint Energy (CNP) Inc., said Edward Jones & Co. Allete Inc., valued at $2.1 billion, may attract Warren Buffett’s Berkshire Hathaway Energy Co., said Fort Washington Investment Advisors Inc. Buffett signaled recently that his utility division has the appetite for another “major” acquisition.

“We’re in an environment right now where utility investors are paying more for certainty in earnings and are paying more for regulated assets versus unregulated assets,” Andrew Pusateri, a St. Louis-based analyst at Edward Jones, said in a phone interview. That translates to a “renewed focus for companies to try to acquire more regulated assets.”

Buying Regulation

Wisconsin Energy’s $9 billion offer for Integrys pushed acquisitions of utility companies this quarter to $43 billion, according to data compiled by Bloomberg. Deal activity in the industry hasn’t been that high since the first quarter of 2011. Including Cleco and other proposed transactions, merger volume for the last three months rises to $49 billion, the data show.

Some utility companies are using acquisitions to increase their regulated assets and reduce their exposure to the competitive and more volatile unregulated market, according to Stacy Nemeroff, an analyst at Bloomberg Industries.

Hydraulic fracturing, or fracking, has unlocked energy resources trapped in shale-rock formations, fueling a surge in U.S. natural gas production. The increase in supply dragged gas prices to a decade low, reducing power prices and causing the unregulated utilities operations to underperform, Nemeroff said. Regulated utilities have contracts that enable them to earn a certain percentage of profit.

“On the unregulated side, it’s competitive generation and it’s kind of sink or swim,” she said. With regulated utilities, “basically all of the companies are guaranteed a return on their investments.”

Relative Returns

The stable returns of regulated utilities such as Cleco have become even more attractive the last few years, with the Federal Reserve holding its benchmark interest rate near zero, said Tom Schindler, a fund manager at Diamond Hill Capital Management Inc.

“People are looking for reasonably steady returns that might not be, at this point looking forward, high rates of return but reasonably assured,” Schindler, whose Columbus, Ohio-based firm oversees about $14 billion including Cleco shares, said by phone. “The utilities keep the power on and in return, they are allowed a fairly attractive rate of return.”

Buyer Interest

Cleco this week said that it has received interest from third parties about a deal and that it hired Goldman Sachs Group Inc. and Tudor, Pickering, Holt & Co. to help review the proposals. The Wall Street Journal reported on June 20 that CenterPoint Energy and Borealis Infrastructure, a unit of the Ontario Municipal Employees Retirement System, were weighing bids for the company.

“If CenterPoint is looking to grow its geographic area, it could make sense,” Pusateri of Edward Jones said. “It would increase CenterPoint’s market share in the Louisiana area.”

A representative for Pineville, Louisiana-based Cleco declined to comment, while Houston-based CenterPoint didn’t respond to a request for comment.

Buyers could offer Cleco shareholders at least a 20 percent premium, according to Bloomberg Industries’ Nemeroff. She based her June 23 analysis on recent utility acquisitions and Cleco’s average stock price in the 20 days before reports of a deal surfaced. That would value the company at about $5 billion, including net debt.

Buffett Billions

Other possible targets in the industry include Alliant Energy Corp. (LNT), Pusateri of Edward Jones said. The Madison, Wisconsin-based company, valued at $6.7 billion, has high exposure to regulated assets and could be a good fit for Buffett’s Berkshire Hathaway Energy, he said.

Buffett this month reiterated his interest in expanding in energy after striking deals to increase his utility business in Nevada and Western Canada.

“We’ve poured billions and billions and billions of dollars in retained earnings, and several billion of additional equity,” into the energy business, Buffett, 83, said at the Edison Electric Institute’s annual convention in Las Vegas this month. “And we’re going to keep doing that as far as the eye can see.”

Allete (ALE) may also be an acquisition candidate for Berkshire Hathaway Energy, said Bill Bunn, a fund manager and credit analyst at Fort Washington, whose parent company Western & Southern Financial Group oversees about $45 billion.

The Duluth, Minnesota-based company is something that “might fit their protocols,” Bunn said in a phone interview. “It’s roughly in their territory.”

Shares of Cleco rose 0.2 percent to $58.68 today. Allete rallied 1.3 percent to $50.96, while Alliant climbed 0.2 percent to $60.08.

A representative for Allete didn’t respond to requests for comment. Representatives for Berkshire Hathaway Energy and Alliant Energy said the companies don’t comment on speculation.

Diminished Benefits

Utility mergers can be difficult to execute because they tend to attract significant regulatory scrutiny. Even if they’re approved, concessions required by the government can undermine the benefits of consolidation, said Bunn of Fort Washington. Companies may instead aim for assets in the faster-growing midstream energy area, which includes processing and transporting, he said.

“It’s a little awkward to do these electric-to-electrics anymore, especially when they’re across the country,” Bunn said. “If it’s contiguous it makes more sense, but then you’ve got to be very careful again because too many states and too many governors and too many regulators want to use it as a pinata.”

Merger Math

Even so, there are acquisition opportunities among regulated utility companies that could offer as much as a 15 percent boost to per-share earnings, Paul Dabbar, head of power and gas mergers and acquisitions at JPMorgan Chase & Co., said at the Edison Electric Institute convention this month.

“I could go to any one of these big CEOs and show them the companies around them that are smaller than them and go through the math,” Dabbar said. “For a regulated entity, this is a unique time that will go back to normal someday.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling

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