Great Plains Energy Inc.'s $ 8.6 billion deal to buy Westar Energy Inc. shows the high risk some power companies are willing to take to grow through acquisitions.
The Kansas City, Missouri, utility owner is paying a premium of at least 23 times Westar's 2017 expected earnings, making it one of the richest utility deals in recent history, according to SunTrust Robinson Humphrey Inc. and Evercore ISI. Great Plains will nearly triple its debt to acquire its neighbor and almost double its electric customer base to about 1.6 million.
"It is a rich deal and it's a fairly large acquisition given their size," said Ali Agha, managing director for equity research at SunTrust Robinson Humphrey. "It's a huge premium to other transactions and it's a huge premium to the stand alone public companies."
The transaction comes amid a boom in utility mergers and acquisitions as customers using more energy-efficient appliances and resources such as rooftop solar flatten electricity demand. There were about $ 52 billion worth of utility deals pending or completed across the U.S. last year, the most since 2011, data compiled by Bloomberg show.
Great Plains shares fell 5.9 percent to close at $ 29.18 after slumping as much as 8.1 percent earlier. Westar rose 6.4 percent to $ 56.33.
Credit Ratings
The debt-laden deal may cause the credit rating on Great Plains' holding company to slip, though it will maintain its investment grade, Chief Executive Officer Terry Bassham said in a call with analysts Tuesday.
"The key to the deal is going to be synergies and what they can do with that," Agha said.
Great Plain's debt will increase from more than $ 4.2 billion at the end of 2015 to $ 12.2 billion after assuming Westar's obligations and issuing $ 4.4 billion of new debt to finance the deal, Chief Financial Officer Kevin Bryant said in a phone interview. New debt will include multiple tenures from five to 30 years with "a bit of a bias on the shorter end," he said.
Given the company's current long-term credit rating of Baa2 from Moody's and BBB+ from S&P Global Ratings, "we have little bit of room," Bryant said. "We are not only adding debt. We would be adding cash flows."
Bond Spreads
Goldman Sachs Group Inc., which is advising Great Plains, will provide about $ 8 billion of debt financing for the deal, the companies said in a statement Tuesday. Pension fund Ontario Municipal Employees Retirement System will make a $ 750 million mandatory preferred convertible equity investment in the company once the deal closes, which is expected in the spring of 2017. To help finance the transaction, Great Plains plans to issue equity before the deal closes.
"They are adding enough leverage to the situation that their ratings will be under pressure," and that will in turn pressure their bond spreads, said Phil Adams, an analyst in Chicago at debt researcher Gimme Credit. "Strategically I like the deal from everything I've heard so far. It doesn't seem like it's going to be too difficult to get the thing approved."
Size Matters
Great Plains has a value of about $ 4.8 billion compared with Westar, the biggest utility in Kansas, worth about $ 7.5 billion. Great Plains has about 838,000 customers in Missouri and Kansas, according to the company's website.
"The challenge obviously is that Westar is a bigger company than Great Plains so they are biting off a mouthful," said Tim Winter, utility analyst with Gabelli & Co. in St. Louis. Financing will be a "manageable challenge."
Great Plains beat out at least one power giant in wooing its Kansas partner. Westar CEO Mark Ruelle called the process competitive but "confidential" and declined to disclose other bids. Westar had also drawn interest from Ameren Corp. and an investor group that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board, people familiar with the matter said last month, asking not to be identified because the information wasn't public.
"The transaction fulfills everything that we've been saying about the subject of M&A, that is the consolidation will continue, that eventually size matters and in considering whether to be a consolidator or among those consolidated, companies have to pick a line," Ruelle said in the call.
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