by Tanya Bodell, Energyzt
More than $50 billion in proposed electric utility mergers and acquisitions have been announced this year. In an industry that has consolidated nearly 200 investor-owned utilities in 1992 to around 60 today, the size and scope of proposed mergers and acquisitions is turning into multibillion-dollar propositions. Although the complexity of closing such megadeals is well beyond the scope of this one-page column, sailboat racing tactics provide high-level insight into how these megatransactions make it across the finish line.
Speed off the Line
The beginning is critical to the success of any endeavor, and mergers are no different. Companies most likely to prevail on an announced transaction are those that performed detailed research and analysis to develop an overriding strategy and set of tactics prior to the public announcement. Understanding the universe of targets, criteria for assessment, objectives of a transaction, potential challenges, possible white knights and regulatory risk mitigation allows a company to approach the start with knowledge and momentum. Those that do not do a thorough set of advanced assessments usually face a troubled start with unpleasant surprises along the way. Run the line, pick the bias, understand the position of others, develop a clear strategy, watch your timing, find your alley and speed off the line in clean air. An example of a brilliantly executed start is the $7.9 billion Exelon Corp. and Constellation merger where the merger plan proposed the sale of three pivotal coal plants as part of the original deal, presciently assuaging potential market power concerns from day one.
Keep in Clean Air
State and local authorities, the Federal Energy Regulatory Commission, Nuclear Regulatory Commission, Federal Communications Commission, Department of Justice and state commissions often total half a dozen or more regulatory agencies that must examine the proposed merger or acquisition to assess benefits and costs from different angles. Understanding who is bound to interfere with your course and give you bad air, along with how you will address those situations, is critical to ensuring smooth sailing through transaction approval. The $26 billion Duke Energy Corp. acquisition of Progress Energy was a masterful example of managing regulators, successfully arguing that the combination of two regulated utilities posed no market power issues, thereby eliminating some of the regulatory turbulence that otherwise would have been raised.
Find the Mark
With so many regulators and stakeholders to appease, it is sometimes easy to lose sight of the mark. Ongoing negotiations over the long timeframes required to complete the transaction adds to the tendency to deviate from the original objective. Although there will be plenty of tacks and jibes along the way, regularly reassess your position with respect to the initial purpose of the transaction. Conditions are constantly changing, and new information will be obtained during the course. Do not be afraid to respond to these shifts so long as the goal remains valid. And if the mark is moved, re-evaluate your course, even if means not finishing the race. The cancelled $1.8 billion acquisition of Entergy Corp.’s transmission assets by ITC Holdings Corp. provides an example of a situation where initial regulatory objectives set the mark and rejection of the deal by the Mississippi Public Service Commission removed it.
Pay Your Penalties
So what happens when someone protests the merger? Do a 720-degree turn. Amid a merger, a serious challenge usually requires two 360-degree turns: one to understand the entirety of the position of the entity that is raising the protest; the second to understand your own position vis-Ã -vis the challenge and how you want to respond. Armed with this new understanding, set a new course to respond and address the challengers’ concerns in a timely manner at an opportune time. An illustration of this tactic is the Northeast Utilities $5 billion purchase of NStar which, after initial refusal, incorporated a power purchase agreement with Cape Wind to ensure Massachusetts approvals.
Finish at the Favored End
As in sailing, completing a merger often has a quicker route tied to meeting policy objectives, agenda, concerns or all. Although these outside issues might seem superfluous, they can be critical to obtaining the approvals required to close the deal. The recently announced acquisition of Integrys Energy Group by Wisconsin Energy Corp. for $9.1 billion includes divestiture of Integrys Energy Services to target close in 2015.
The sailing season in New England is coming to an end, but merger activity in the power sector is still going strong. Stay tuned as more megamergers are announced, and watch for the strategy and tactics that such sport requires.
Tanya Bodell is the executive director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. She thanks Richard Cate and Peter Goedecke for a great sailing season on Stiletto. Visit www.energyzt.com. Reach her at firstname.lastname@example.org or 617-416-0651.