- Offer represented a 14% premium to Monday's closing price
- Fortis follows other power companies seeking better growth
Fortis Inc. agreed to buy ITC Holdings Corp. for $6.9 billion in cash and stock, in what will be the largest Canadian takeover of a U.S. utility. Its shares fell the most in more than 28 years, and ITC also declined.
Fortis, Canada’s largest utility owner, will pay the equivalent of $44.90 for each ITC share, according to a statement Tuesday. That’s a 14 percent premium to Monday’s close, and a 33 percent premium to the close on Nov. 27, before Bloomberg reported that ITC was exploring a sale. The offer, which totals $11.3 billion including assumed debt, will comprise $22.57 in cash and 0.752 Fortis shares apiece.
The sale comes as power companies, grappling with flat electricity demand and rising capital costs, seek deals in other areas promising better growth. ITC’s transmission lines earned the highest adjusted return on equity of any U.S. electric network utility holding company. In an uncommon step, Fortis said it intends to finance the cash portion of the deal by marketing as much as a 19.9 percent stake in ITC to another investor.
“Fortis shareholders are concerned about equity potentially being diluted by the deal,” Stacy Nemeroff, an analyst at Bloomberg Intelligence, said by phone Tuesday. “If they can’t find a buyer they might have to issue more equity.”
Fortis fell 10 percent, the biggest one-day decline on record, to close at C$37.14 in Toronto. ITC fell 1.9 percent to $38.65. The premium, or difference between ITC’s price and the per-share deal value, narrowed to 10 percent, according to data compiled by Bloomberg.
Fortis, based in St. John’s, Newfoundland and Labrador, bought Arizona utility owner UNS Energy Corp. for $2.5 billion in cash in 2014 and New York utility owner CH Energy Group Inc. for about $968.5 million in 2013. With ITC, Fortis expects to capitalize on construction of new high-voltage lines as the administration of President Barack Obama encourages development of wind farms and other sources of renewable energy.
“Transmission earnings are not dependent on usage, so there’s no risk from declining electricity consumption,” Nemeroff said. “They’re in the Midwest, where there will be a lot more wind-generation built so there will be increasing demand for new transmission.”
“Fortis has grown its business through strategic acquisitions,” Chief Executive Officer Barry Perry said in the statement. “The acquisition of ITC – a premier pure-play transmission utility – is a continuation of this growth strategy.”
In other recent deals, Southern Co. is buying gas distributor AGL Resources Inc. for about $8 billion in cash and Duke Energy Corp. is buying Piedmont Natural Gas Co. for about $4.9 billion. Halifax, Nova Scotia-based Emera Inc.’s purchase of Teco Energy Inc. for about $6.5 billion is pending.
ITC earned an adjusted return on equity of more than 17 percent in 2014, above the 11 percent average of its peers including Consolidated Edison Inc. and Sempra Energy, data compiled by Bloomberg show. It’s the only publicly traded U.S. company that owns only transmission lines. Fortis anticipates a return on equity higher than 11 percent at ITC’s business, Perry said on a call with analysts.
Fortis intends to sell $2 billion of debt and as much as 19.9 percent of Novi, Michigan-based ITC to other investors to finance the cash portion of the deal, according to the statement. Efforts to sell the stake, potentially to an infrastructure fund, will begin promptly and a deal is expected by June 30, Perry said on the call. The takeover isn’t contingent on the stake sale, he said. The deal is expected to close in late 2016 subject to shareholder and regulatory approvals.
Goldman Sachs Group Inc. and Bank of Nova Scotia advised Fortis and provided financing. White & Case LLP and Davies Ward Phillips & Vineberg LLP were legal advisers. Barclays Plc and Morgan Stanley advised ITC. Legal advisers were Simpson Thacher & Bartlett LLP. ITC’s board was advised by Lazard Ltd. and Jones Day.
Fortis intends to seek listing of its common stock on the New York Stock Exchange in connection with the acquisition. ITC will continue as a stand-alone transmission company and its shareholders will own about 27 percent of Fortis, according to the statement. Fortis plans to retain all of ITC’s employees and maintain corporate headquarters in Novi.
Federal regulators set ITC’s profit on investments, typically allowing a higher return than states overseeing power suppliers do, according to Nemeroff. While the Federal Energy Regulatory Commission is considering cutting transmission-line rates for some customers, ITC’s returns will probably remain above average, Nemeroff said by e-mail Jan. 26.
ITC owns and operates 15,600 miles (25,100 kilometers) of high-voltage lines in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma. The lines can deliver more than 26,000 megawatts, according to its website. That’s enough power for 20.8 million average U.S. homes, according to its website. The company plans to invest about $3 billion in new lines and improvements through 2018, according to a November investor presentation.