Bernstein studies potential utility merger scenarios

Research firm suspects Dominion, NextEra could be looking to expand

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Plenty of electric utility mergers have already occurred in the past couple of years and the business climate continues to be ripe for more consolidation, AllianceBernstein said in a March 24 analysis provided to clients.

“Across the country, utilities are confronting stagnant volume sales of electricity, constraining revenue growth even as investment in property, plant and equipment continuing to grow,” according to Bernstein.

Recent times have seen mergers involving the combination of FirstEnergy (NYSE:FE) and Allegheny; Exelon (NYSE:EXC) and Constellation; Duke Energy (NYSE:DUK) and Progress Energy; and NRG Energy (NYSE:NRG) and GenOn just to name a few, Bernstein noted.

Bernstein has recently been trying to identify potential pairs of acquirers and targets. The firm said it has looked at four broad criteria: Relative valuation, relative financial performance, operational and geographic similarities, and the potential fit between senior management teams.

For example, Bernstein said that the average age of the CEOs in its sample is 57, while the standard deviation is four. “Our model therefore assigns a higher probability to a merger of any given acquirer/target pair if one of the CEOs is approaching retirement age or if the acquirer's CEO enjoys compensation at least twice that of the target's CEO,” Bernstein said.

With this in mind, Bernstein arrived at lists of likely targets and buyers.

In Bernstein’s view the more interesting combinations turned up by the model were Alliant Energy (NYSE:LNT) and ALLETE (NYSE:ALE); Ameren (NYSE:AEE) and MGE Energy (NASDAQ:MGEE); Dominion (NYSE:D) and SCANA (NYSE:SCG); Dominion and FirstEnergy.

While Dominion could be an interesting combination with either SCANA or FirstEnergy, Bernstein identifies NextEra Energy (NYSE:NEE) as a compelling partner for any of three publicly-traded companies – including OGE Energy (NYSE:OGE); Portland General Electric (NYSE:POR) or TECO Energy (NYSE:TE).

(It should be noted that NextEra is currently in the process of trying to merge with Hawaiian Electric Industries (NYSE:HE), which has electric utility subsidiaries in Hawaii. Public informational meetings are taking place in Hawaii through April 16 on the proposed merger).

When contacted a Dominion spokesperson said, “we don’t comment on market rumor and speculation.”

Bernstein noted that not all of the stocks mentioned in the analysis are covered by Bernstein; “furthermore our analyses of possible merger combinations are based on our model results and, to our knowledge, the companies have not commented publicly on these potential combinations.”

The analysis was done by a team led by Bernstein Senior Analyst Hugh Wynne. AllianceBernstein is a global asset management and research firm affiliated with Bernstein Research and Sanford C. Bernstein & Co.

Wayne Barber
About the Author

Wayne Barber

Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants.

Wayne can be reached at wayneb@pennwell.com.

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