Two U.S. Utility Mergers Squashed in a Week Offer a Lesson
(Bloomberg) -- There’s a lesson to be had from the two multibillion-dollar U.S. utility mergers blocked by state regulators just in the past week: Do not underestimate the power of local government.
“The theme is local control,” said Tim Winter, a utilities analyst at Gabelli & Co. Inc.
First, NextEra Energy Inc.’s $18 billion bid to buy Oncor Electric Delivery Co. fell apart when it refused Texas’s wish to give an independent group of shareholders some control over budget decisions, among other things. That was followed on Wednesday by Kansas rejecting Great Plains Energy Inc.’s $8.6 billion plan to take over Westar Energy Inc. The state wanted safeguards, such as an independent Westar board, that the companies said would be a deal-breaker.
It’s this state-level desire to preserve local authority that’s contributed to what Glenrock Associates analyst Paul Patterson described last week as an expanding “graveyard” of failed utility mergers, underscoring the unique challenges such deals face in this sector alone. The average multibillion-dollar utility deal has taken almost a year to finish, double the time for most other industries -- largely because of the time it takes for state regulators to sign off on them.
“The decision highlights how big regulatory risk is to utility mergers,” Patterson said. “Every state has their own regulatory DNA, and you saw that in Kansas and Texas.”
Be ready to “spend years” closing a utility merger -- and be ready to walk away if it gets too expensive, Bloomberg Intelligence analyst Kit Konolige said. “And definitely spend a lot of time with the local folks.”
Exelon Corp. had to go before Washington, D.C., regulators three times before gaining their blessing to buy Pepco Holdings Inc. for $6.8 billion last year. It took a residential rate freeze as well as giving the local government discretion to spend $20 million of $78 million in promised customer benefits. If there’s anything to learn from that deal, Konolige said, it’s that patience and being “willing to raise the stakes enough to get it done” are key.
Is it Over?
“For all we know, it could happen in some of these cases,” he said. “It’s hard to say it’s definitely over until the utilities say it’s definitely over.”
Indeed, NextEra has plans to revive its bid to buy Oncor, either by challenging Texas’s decision or negotiating with some of the state’s biggest power users. And after getting rejected by Kansas on Wednesday, Westar noted that it’s “not uncommon to have mergers be denied, only to later have them be reconsidered and completed.”
“But there is no assurance of that,” Westar spokeswoman Jana Dawson went on to say by email.
Westar plunged the most in eight years on Thursday, trading at $50.73 at 12:41 p.m. in New York. Great Plains Energy was up 0.7 percent at $29.71.