The typical utility merger will need to win approval from several federal agencies as well as regulators in the states where it does business. That includes anti-trust approval from the US Department of Justice, the Federal Energy Regulatory Commission in the case of electric and gas companies, the Federal Communications Commission for utilities with exposure to that sector and the Nuclear Regulatory Commission for ownership of nuclear power plants. In addition, a cross border deal will need the OK of the Committee on Foreign Investment.
And federal approvals are often the least of merging companies’ worries. That distinction is usually reserved for state public utility commissions. Even those considered favorable to utilities have used merger approvals as leverage to influence behavior in recent years. And some commissions have arguably set standards for approving deals that are really meant to discourage offers.
Even utility deals that sail through the approval process can take up to a year to close, due to the sheer volume of needed filings, hearings and settlement discussions. That means utility deals are subject to a level of uncertainty not found in deals between companies in other sectors. And it means target companies often trade at a discount to the value of takeover offer.
The upshot is there are two ways to bet on utility sector mergers. The least certain but most potentially lucrative is to pick potential targets before deals are announced. The second is to bet on a deal to close where the target company trades at a big discount to the takeout price. Your return from a successful bet is the capital gain from narrowing the gap plus any dividends paid while you wait.
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