Revised Great Plains-Westar Deal to Form $14 Billion UtilityBy
Stock deal with Great Plains hit rejection ‘head-on,’ CEO says
Merger of equals ‘approaches’ value of initial offer, CEO
Westar Energy Inc. agreed to merge with Great Plains Energy Inc. on equal terms after regulators in April said the premium on an initial proposal by the utility owners would create a company with too much debt.
The companies’ boards of directors unanimously approved a stock-for-stock merger with no premium to be paid to either and no exchange of cash, according to a joint statement Monday. That “approaches” the value of an earlier $8.6 billion cash offer by Great Plains and makes sense given the rally in utility stocks over the past year, Westar Chief Executive Officer Mark Ruelle told analysts on a conference call.
The deal first emerged in 2016 during a surge in utility tie-ups and acquisitions that continued with Friday’s announcement that Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Oncor Electric Delivery Co., the largest electric-transmission operator in Texas. While Ruelle said the new approach will deliver greater value, and tackles regulator’s concerns “head on,” Westar investors weren’t so sure. Shares fell by the most since April on a day when a broad index of utilities moved higher.
“Investors may be thinking Westar deserved a premium,” Stacy Nemeroff, a Princeton, New Jersey-based analyst for Bloomberg Intelligence, said by phone. “Westar is the stronger company and has higher earnings prospects.”
The tie-up would form a utility holding company of about 1 million Kansas customers and nearly 600,000 customers in Missouri. Westar shareholders will get a dividend increase of about 15 percent and 53 percent of the stock in a yet-to-be named company, according to the statement. There will be no layoffs as a result of the merger, and the new company will provide customers with a one-time rate credit of at least $50 million.
“Regulators unequivocally rejected the prior premium sale,” Ruelle said in a phone interview. “They basically precluded a deal in the high $50 to $60 range. A premium price in the mid $50’s is not as attractive to us as this opportunity.”
Kansas regulators had balked at the premium Kansas City-based Great Plains agreed to pay for Topeka, Kansas-based Westar, citing cuts to its credit rating that would increase borrowing costs. Great Plains’s debt was set to 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.
Monday’s announcement “would seem to address the issues raised in the order that rejected the previous merger,” Paul Patterson, a New York-based analyst for Glenrock Associates LLC, said by phone. “This is an industry that has been consolidating for some time and probably will continue in the future.”
The combined company expects to issue about 270 million shares and buy back 30 million of those a year in 2018 and 2017, Ruelle said. He’d become non-executive chairman upon closing of the deal, which is expected in the first half of 2018.
Merging the utility owners will produce savings and a net operating efficiency of as much as $45 million in 2018 and as much as $170 million by 2021, the companies said.
Westar shares fell as much as 5.5 percent, the most since April 20, and were trading at $50.50 at 12:11 p.m. in New York. Great Plains rose 2.9% to $30.10.
Goldman Sachs Group Inc., Barclays Plc and Lazard Ltd. advised Great Plains. Guggenheim Securities LLC advised Westar.