Once `Enron of Kansas,' Now a Target
Westar Energy is betting the utilities buying spree has a bit further to go. And it's probably right.
If you don't recognize the name, you may remember "Enron of Kansas," the less-than-desirable moniker given to the company in the early 2000s because of fraud charges brought against former executives that were later overturned (more on that later). Now, more than a decade later, the $6.8 billion electricity provider is in the early stages of talking with potential advisers and gauging buyer interest, people with knowledge of the matter told Bloomberg News.
The Westar of today is smart to put feelers out. U.S. utility companies have been the target of more than $120 billion of takeover offers since the start of 2014 and they've been commanding top dollar. Efficiency improvements and slower economic expansion have weakened demand for electricity, pushing operators to consolidate -- price be damned. Regulated utilities like Westar can be particularly desirable because of their relatively stable cash flow and returns in this time of low commodity prices and interest rates.
That said, Westar was already trading near a record even before it jumped as much as 10 percent on the news of a possible sale Thursday. It now trades for 23 times its earnings in the last 12 months, one of the highest multiples among big U.S. utility peers. That makes for a lofty price tag even in an industry with increasingly expensive tastes, particularly when you consider that analysts aren't projecting gangbusters results for the company.
Net income and revenue this year are projected to jump by 19 percent and 8 percent, respectively, but that's largely because Westar is recovering from a pretty ugly 2015 in which results got pulled down by warmer weather. Lower sales to some industrial customers -- a problem for a number of utilities, as my colleague Liam Denning has noted -- have also caused their fair share of damage. The outlook for 2017 and 2018 calls for much more moderate growth.
Westar has also had to grapple with a few regulatory proceedings whose outcomes, while not disastrous by any means, weren't ideal. 1 It's worth noting that before news of the bid, analysts on average were calling for a decline in Westar's stock price over the next year. Buyers have shown a willingness to pay pricey valuations, but they haven't gotten the warmest reception from investors when they've done so. At what point does a utility deal become too expensive?
Buyers could also be turned off by the regulatory challenges plaguing a number of big utility deals. Louisiana's Public Service Commission last month rejected a planned purchase of Cleco by an investor group led by Macquarie for about $5 billion including debt (the companies have asked the state to reconsider). Exelon is still trying to persuade District of Columbia regulators to approve its $12 billion takeover of Pepco Holdings, a deal struck almost two years ago.
And yet, pricey valuations and regulatory concerns have been a concern for a while now, and neither has done much to slow buyers down. Two Canadian utility companies announced purchases of U.S. counterparts -- worth a combined $14 billion -- on the same day last month. The urge to manufacture growth is strong. Investors aren't going to own every utility stock so if a company can offer a little extra dividend growth, all of the sudden it's going to be the darling, says Bill Bunn, an investor in utility and midstream energy companies at Fort Washington Investment Advisors.
In any case, things will probably go better for Westar's sale aspirations today than they did when the company previously tried to sell itself some 15 years ago.
Westar, at the time known as Western Resources, tried to sell its utilities operations to Public Service Co. of New Mexico, but the deal fell apart in 2002 after regulators ordered the target to cut electricity rates for customers and blocked a plan to spin off its other assets including Protection One burglar alarms and a stake in a gas company. The CEO and his head of strategy were indicted the next year on charges of allegedly looting the company for millions in personal benefit. A 2005 conviction on certain charges was later overturned and the executives received unpaid millions in compensation and legal fees.
That was then. Today, it can't hurt to test the waters again.
Kansas in September approved a rate increase of $78 million to help cover the costs that the company had already incurred in upgrading some of its power plants. That was about half the boost Westar had originally requested, meaning it will have to hold off on some additional improvement plans. Westar had also sought special dispensation from regulators for its wind energy developments. It's looking like that won't happen right now, the company said on its recent earnings call.
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