Dive Brief:
- Merger and acquisition activity in the utility sector shows little signs of slowing, according to a research note from Mizuho Securities US, though companies should keep a close eye on regulatory hurdles and consider the extent to which regulators are supportive of the deal.
- SNL Energy reports analysis issued by the investment banking firm predicts bids for Hawaiian Electric, Pepco Holdings and Cleco Corp. will all fall through, not because of the economics but because companies misjudged the regulatory difficulty in pushing the deals through.
- Stagnant load growth and an environment of low interest prices have fueled M&A activity recently, wit several high profile deals announced in the electric utility sector and crossing across the gas-electric divide. Data last year showed utility deals in North and South America reached $57 billion in the third quarter of 2015, marking a 5-year record for the quarter.
Dive Insight:
As long as both electric load growth and interest rates remain flat, Mizuho Securities expects the current trend of utility consolidation to continue.
"So long as there's a low interest rate environment and markets remain open, we expect M&A activity to remain robust," Mizuho Securities USA Inc. analyst James von Riesemann wrote in a note issued this week. SNL reports the investment bank believes a series of high profile mergers will fail to come to fruition, less a factor of economics than regulatory difficulties.
"If a particular jurisdiction doesn't want an outsider buying the local utility, no matter how penal they've been to that utility, the deal is never going to happen," von Riesemann wrote.
That would appear to be the case with Exelon's proposal to purchase Pepco for $6.8 billion, Mizuho pointed out. Regulators in Washington, D.C., have repeatedly rejected the companies' bids to sweetened the deal. Mizuho also indicated NextEra's $4.3 billion bid for HECO and an international consortium's bid for Cleco will also fall short.
Officials from Cleco were at the Louisiana Public Service Commission this week, urging regulators to reconsider a proposal to take the utility private in a $4.9 billion deal.
"In the U.S., it's pretty difficult for people to make money," accounting firm EY's Matt Rennie previously told USA Today, discussing the consolidation trend. "So we're seeing decisions being taken by larger companies to diversify their holdings to move upstream or downstream to try to recover some of the revenues or profits that they're losing."
Electric-gas mergers are also growing, with high profile power utilities looking to invest in gas pipelines or reserves, as well as distribution. Mizuho predicted Atmos Energy Corp., New Jersey Resources Corp., South Jersey Industries Inc. and Southwest Gas Corp may all be on the auction block in the near future.
