Hydro One Falls as Investors Sour on Avista's $3.4 Billion PriceBy and
Acquisition exposes Canadian company to U.S. regulatory issues
Utility follows Fortis in seeking higher returns abroad
Hydro One Ltd. fell the most in eight months after agreeing to buy U.S. power supplier Avista Corp. in a $3.4 billion deal that analysts said is too costly and exposes the Canadian energy company to regulatory hassles.
The merger will add Avista’s energy production and distribution operations in Washington, Idaho, Oregon and Alaska to Hydro One’s transmission network in Ontario, creating one of North America’s largest regulated utilities, with assets totaling C$32 billion ($25.4 billion). Avista stockholders will receive $53 a share in cash, 24 percent above the market close Tuesday.
The takeover -- following multibillion-dollar deals by Enbridge Inc., TransCanada Corp. and Fortis Inc. -- is another testament to Canada’s hunger for U.S. energy assets offering higher returns. But the price was too high for some analysts, with Hydro One paying about 11.2 times Avista’s earnings before interest, taxes, depreciation and amortization, more than the 9.3 average multiple for comparable deals, according to data compiled by Bloomberg. Hydro One plans to issue $1.1 billion of equity and $2.6 billion of debt to finance the deal.
“Hydro One is paying the price to gain exposure to U.S. markets,” Shahriar Pourreza, an analyst at Guggenheim Securities, said in a note Thursday. The “very rich valuation” is “likely a near-term anomaly.”
Hydro One fell as much as 5.4 percent to C$21.32 in Toronto, the biggest intraday decline since Nov. 10, before paring losses. Avista rose 20 percent to $51.83 in New York.
While Pourreza said the deal will likely close, it will require the approval of several agencies, including utility commissions in Washington, Oregon, Idaho, Alaska and Montana, and the U.S. Federal Energy Regulatory Commission. Washington, where the bulk of Avista’s assets are located, is a “challenging jurisdiction,” he said.
The companies expect to complete the merger by the end of the second quarter of next year. They also said they don’t expect to cut jobs as a result of the transaction.
The Avista purchase is the largest deal for Hydro One since the Toronto-based utility went public in 2015, selling shares at C$20.50 a piece as part of the largest initial public offering in 15 years.
The Ontario government, the largest shareholder, sold stock to raise money for infrastructure projects and to pay down debt. The government most recently disclosed another share sale in May, reducing its stake in Hydro One to just under 50 percent.
The government’s stake may fall further after Hydro One completes a sale of $1.1 billion in convertible debentures to help finance the Avista deal. These debt securities can be converted into stock. The company has agreed to sell the debentures to a group of banks co-led by RBC Capital Markets, CIBC Capital Markets and BMO Capital Markets.
Using this much debt is “typical” in cross-border deals “where you have a much larger company that can use their balance sheet to borrow and make a cash acquisition,” said Kit Konolige, a utilities analyst for Bloomberg Intelligence. “There are a only a handful of Canadian utilities, so if you want to grow, then U.S. utilities are one major arena where you would look to go.”
Hydro One’s Schmidt said in a call with investors Wednesday that the company expects Standard & Poor’s to confirm an investment-grade credit rating. The rating may be lowered one notch to A-, the fourth level above junk status, primarily because the company is entering a new market, he said.
Moelis & Co. LLC is the exclusive financial adviser to Hydro One. BofA Merrill Lynch is Avista’s. Bracewell LLP is serving as Hydro One’s legal adviser. Kirkland & Ellis is Avista’s.
— With assistance by Maciej Onoszko, and David Scanlan