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Feature Article

Three Ways to Play the Utility Takeover Boom

By Roger S. Conrad on Sep. 14, 2015

The history of gas, electric and water utilities is one of ongoing consolidation. Sometimes the deals come fast and furious, such as in the late 1990s and the mid-2000s; other times, merger and acquisition activity slows to a trickle.

(Click graph to enlarge.)Utility Report Card Annual Deal Flow Roger Conrad

Over the past few years, an upsurge in deal flow has resulted in a number of utilities and telecom stocks being taken over for sizable premiums, handing lucky investors a handsome windfall.

We were on the receiving end last year, when NextEra Energy (NYSE: NEE) announced a takeover offer for former Aggressive Income Portfolio holding Hawaiian Electric Industries (NYSE: HE), which we sold for a 29.6 percent gain.

Meanwhile, the best acquisitions result in a stronger company with improved growth prospects. Consider Conservative Income Portfolio holding WEC Energy Group (NYSE: WEC), formerly Wisconsin Energy Corp, which plans to accelerate its annual dividend growth after digesting its takeover of Integrys Energy Group.

The past month has brought three noteworthy deals involving essential-services companies covered in our Utility Report Card.

On Aug. 24, 2015, Conservative Income Portfolio holding Southern Company (NYSE: SO) announced an agreement to acquire Atlanta-based gas utility AGL Resources (NYSE: GAS) for $12 billion—a 38 percent premium. This pending transaction marks Southern Company’s latest push into natural gas as the utility seeks to phase out its coal-fired generation capacity.

Last month, TECO Energy’s (NYSE: TE) management team confirmed reports that the company had engaged advisers to explore strategic alternatives for the company, including a potential sale.

Fast-forward a month and Canada-based electric utility Emera (TSX: EMA, OTC: EMRAF) stepped up to the plate with a cash offer of US$27.55 per share—a roughly 50 percent premium to where the stock traded when TECO Energy started its strategic review.

The urge to merge has also hit the telecom sector. In August, regional telecom provider Shenandoah Telecommunications Company (NSDQ: SHEN) agreed to acquire ailing rival NTELOS Holdings (NSDQ: NTLS) for $9.25 per share in cash—a take-under relative to the target’s stock price a year ago, but more than two times its July 2015 low.

Four Catalysts for Deals

Several factors suggest there should be plenty more deals to come.

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