Waiting For a U.S. Utility Takeover? Check Back in 316 DaysBy
Multibillion-dollar takeovers languish on regulatory hurdles
Industry offers rate freezes, credits to win state approvals
Waiting for a utility takeover to be completed in the U.S.? Get comfortable. If history is a guide, it’s going to be a while.
In the past 10 years, the average deal valued at more than $3 billion has taken 316 days to finish, almost double the typical closing time for U.S. mergers and acquisitions, data compiled by Bloomberg show.
Buyers have experienced a rash of initial rejections as states seek more benefits from takeovers. Exelon Corp. and NextEra Energy Inc. saw regulators balk at their acquisition terms. The delays are increasing costs and weighing on the shares of utility giants seeking to combine assets in the face of tepid power sales and mounting environmental rules.
“State regulators take just about six to nine months to do anything,” said Kit Konolige, senior utilities analyst for Bloomberg Intelligence. That’s how long it typically takes for them to decide on electricity rate increases, “and for many states, a merger proposal tends to look a lot like a rate case,” he said.
On Monday Exelon made a second attempt in Washington to take over Pepco Holdings Inc. Ten days earlier, Spain’s Iberdrola SA sweetened its $3 billion proposed deal to buy Connecticut-based UIL Holdings Corp. with customer credits and rate freezes to overcome regulatory opposition. They’re not the first would-be utility buyers to face headwinds.
Consumer groups and watchdogs see utility deals “as their one chance to get something back” from a monopoly that charges them for power every second of the day, said Andy Smith, a St. Louis-based utilities analyst for Edward Jones & Co.
The push-back hasn’t yet slowed the pace of deals announced. Seven takeovers worth $3 billion or more are now pending before regulators. Still, less than 20 utility deals have been completed in the U.S. over the previous decade, the least of any sector.
The largest of the pending utility takeovers, Exelon’s $6.8 billion offer for Washington-based Pepco Holdings Inc., has taken 518 days so far. It was rejected last month by the District of Columbia’s Public Service Commission, which said the proposal wouldn’t benefit customers. The companies asked for reconsideration on Monday and said they’re in settlement talks with the office of Mayor Muriel Bowser.
Exelon shares climbed 1.9 percent on Wednesday to close at $29.70 in New York. Pepco gained 0.3 to $24.22.
In June, Iberdrola failed in its first bid to buy UIL, the owner of utilities in Connecticut. The state’s Public Utilities Regulatory Authority said it wasn’t clear how the Bilboa, Spain-based suitor planned to run the company. Iberdrola proposed $40 million in rate credits on Sept. 18 as part of a settlement with the state agency that advocates for consumers. If Iberdrola closes the purchase by the end of the year, as the company forecasts, it will have taken 309 days.
It could be worse. In the previous decade, utility deals averaged about 413 days, with American Electric Power Co. Inc.’s acquisition of Central & South West Corp. taking 907 days.
By comparison, the average takeover in the financial sector, which includes banks and real estate, takes 132 days. Even deals in communications, which regulators scrutinize for potential market power concerns, average a little over six months.
Hawaii’s governor challenged NextEra’s $2.63 billion offer for Hawaiian Electric Industries Inc., saying the Juno Beach, Florida-based utility offered few details on how it would meet a state goal of getting all of its power from renewable sources. Other critics accused NextEra of trying to dominate the energy market on the islands to raise prices. “If nothing else, they’re trying to get what they can,” Konolige of Bloomberg Intelligence said.
“It’s tougher and tougher to look at a transaction that’s really going to provide long-term shareholder value, given what you can usually expect the regulators to do,” Northwestern Corp. Chief Executive Officer Bob Rowe said at a Bank of America conference on Sept. 16. The Sioux Falls, South Dakota-based company was the target of three failed takeovers in 2005 and 2006.
Utilities seeking takeovers to cut costs and boost profits may be discouraged by recent regulatory rejections, Konolige said.
“With the Pepco merger, at least for now, being denied, companies might be a little more reticent, a little more hesitant to try a merger,” Smith of Edward Jones & Co. said. Even so, “if they want to merge, they’re probably going to try it one way or the other,” he said.
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