Behind $8.6 Billion Deal for Westar Is a Hunt for Growth

  • Deal to almost triple Great Plains’ debt, double customer base
  • U.S. utility deals worth $52 billion in 2015, most since 2011

So great is the hunger for growth in the U.S. power sector that Great Plains Energy Inc. is willing to almost triple its debt and risk a lower credit rating to buy neighbor Westar Energy Inc. in an $8.6 billion deal.

The Kansas City, Missouri, utility owner is paying a premium of at least 23 times Westar’s expected earnings next year, making their merger one of the richest utility deals in recent history, according to SunTrust Robinson Humphrey Inc. and Evercore ISI. The company, which had a market value of about $4.5 billion on Tuesday, will almost double its electricity customers by buying Westar, with a value of almost $8 billion.

“It is a rich deal, and it’s a fairly large acquisition given their size,” Ali Agha, a managing director for equity research at SunTrust Robinson Humphrey, said Tuesday after the companies announced the planned merger. “It’s a huge premium to other transactions, and it’s a huge premium to the standalone public companies.”

The transaction is a testament to how starved utilities have become for growth as their customers use more energy-efficient appliances and resources such as rooftop solar to cut power consumption. The weakening demand and rising costs have triggered a boom in utility mergers and acquisitions that totaled about $52 billion in the U.S. last year, the most since 2011, data compiled by Bloomberg show.

Great Plains shares were little changed at $29.20 at 10:16 a.m. Wednesday after dropping 5.9 percent to $29.18 on Tuesday. Westar was up 3 cents to $56.36; it climbed 6.4 percent the previous day.

Credit Ratings

The debt-laden deal may cause Great Plains’ credit rating to slip, though it will maintain its investment grade, Chief Executive Officer Terry Bassham said in a call with analysts Tuesday. Later that day, Moody’s Investors Service placed Great Plains’ long-term ratings on review for a downgrade because of the planned takeover.

“The key to the deal is going to be synergies and what they can do with that,” Agha said.

Great Plain’s debt will increase from more than $4.2 billion at the end of 2015 to $12.2 billion after assuming Westar’s obligations and issuing $4.4 billion of new debt to finance the deal, Chief Financial Officer Kevin Bryant said in a phone interview. New debt will include multiple tenures from five to 30 years with “a bit of a bias on the shorter end,” he said.

Given Great Plains’ long-term credit rating of Baa2 from Moody’s and BBB+ from S&P Global Ratings, the company has a “little bit of room,” Bryant said. “We are not only adding debt. We would be adding cash flows.”

Bond Spreads

Goldman Sachs Group Inc., which is advising Great Plains, will provide about $8 billion of debt financing for the deal, the companies said in a statement Tuesday. Pension fund Ontario Municipal Employees Retirement System will make a $750 million mandatory preferred convertible equity investment in the company once the deal closes, which is expected in the spring of 2017. To help finance the transaction, Great Plains plans to issue equity before the merger’s completion.

“They are adding enough leverage to the situation that their ratings will be under pressure,” and that will in turn pressure their bond spreads, said Phil Adams, an analyst in Chicago at debt researcher Gimme Credit. “Strategically, I like the deal from everything I’ve heard so far. It doesn’t seem like it’s going to be too difficult to get the thing approved.”

Size Matters

Great Plains has about 850,800 customers in Missouri and Kansas, while Westar delivers power to 702,000, according to a company presentation on Tuesday that showed their combined operations would serve more than 1.55 million businesses and homes.

“The challenge obviously is that Westar is a bigger company than Great Plains, so they are biting off a mouthful,” said Tim Winter, utility analyst with Gabelli & Co. in St. Louis. Financing will be a “manageable challenge,” he said.

Great Plains beat at least one power giant in wooing its takeover target. Westar had also drawn interest from Ameren Corp. and an investor group that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board, people familiar with the matter said in April, asking not to be identified because the information wasn’t public. Westar CEO Mark Ruelle described the process as competitive but “confidential” and declined to disclose other bids.

“The transaction fulfills everything that we’ve been saying about the subject of M&A -- that is that consolidation will continue, that eventually size matters and in considering whether to be a consolidator or among those consolidated, companies have to pick a line,” Ruelle said in Tuesday’s call with analysts. “Ours, as I said many times, would be more likely to be that of a seller than a buyer.”

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