Dive Brief:

• Duke Energy has rebuffed an advance from NextEra regarding a possible $60 billion buyout, The Wall Street Journal reported on Tuesday.

• Speaking at a conference Wednesday, NextEra CEO James Robo did not address NextEra’s approach specifically, but seemed to rule out a hostile bid for Duke when he said utility deals had to be mutually agreed upon, not least because of the need to obtain state regulatory approval.

• The merger would be the largest ever in the utility industry, creating a behemoth with a market capitalization of more than $200 billion and annual revenues of almost $45 billion. But analysts pointed to a number of challenges, not the least of which is Duke's recent rejection.

Dive Insight:

NextEra has a poor track record of closing transactions, with recent failed deals in Texas and Hawaii. In addition, Duke’s operations in multiple states mean the risk of regulatory pushback increases.

Citing people familiar with the matter, the Wall Street Journal on Wednesday said NextEra continues to be interested in pursuing an acquisition. But reaching a deal poses significant challenges. If Duke continues to resist, NextEra would have to pursue a hostile takeover. Hostile takeovers are virtually unheard of in the utility business because of big impediments to such an approach.

And even if a deal is agreed upon, there are the usual significant regulatory approvals to obtain, approvals which from time to time gum up utility deals or are denied and kill them altogether. In 2017, the Texas Public Utilities Commission put a swift end to NextEra’s $18 billion bid to acquire Oncor Electric.

"NextEra does not have an exceptionally great track record at closing regulated utility deals," said Scotiabank analyst Andrew Weisel.

NextEra has successfully acquired Gulf Power, a small Florida utility, and Trans Bay Cable, a California transmission enterprise.

NextEra has also walked away from deals. In 2016, in a politically fraught effort, NextEra finally dropped a bid to acquire Hawaiian Electric.

Given extreme differences in valuations of the two companies — NextEra stock is up 22% this year compared to Duke's 14% decline — Weisel sees any deal as highly accretive for NextEra. "We estimate that a deal would be accretive to NextEra’s 2022 EPS by 15% to 20%."

Also driving the accretion would be very significant cost savings generated by any deal, Weisel said.

But "shareholder approval might not be a layup for NextEra, as buying Duke would weigh on its EPS/DPS growth rates, as well as its squeaky-clean ESG profile," Weisel said.

NextEra has not responded to a request for comment. Duke spokesperson Neil Nissan said the company's policy "is that we don’t comment on market rumors or speculation." 

Weisel noted that with its renewables and storage capacity, NextEra has among the best ESG profiles in the industry, while "Duke, by contrast, still relies heavily on coal (~15 GW) and other emitting resources."

Weisel continued, "We expect NEE would accelerate emission reductions for [Duke's] subsidiaries relative even to [Duke's] ambitious plans to be net-zero by 2050, supported by the recently filed IRPs in the Carolinas. Still, the bottom line is that acquiring [Duke] would presumably hurt NEE's ESG profile initially, while medium-term improvements in [Duke's] emissions profile would likely only impact the timing, not the magnitude. 

Another potential obstacle is the needed regulatory approvals. NextEra has regulated operations exclusively in Florida, and Duke has operations in Florida, the Carolinas and the Midwest. Duke’s multi-state regulated profile presents an added risk of regulator pushback on any deal.

Even in light of the high degree of uncertainty facing any deal, as of press time, investors have bid up the shares of Duke about 8% since news of NextEra's actions came out.