Hydro One Limited, the largest electricity transmission and distribution provider in Ontario, has struck a deal to purchase Avista Corp., a pure-play regulated electric and gas utilities holding company that has operations in U.S. northeast and Alaska, for $6.7 billion.
The acquisition, which will see shareholders of publicly listed Avista receive US$53 a share and which was announced after the markets closed Wednesday, marks Hydro One’s first transaction in the U.S. since it went public in late 2015.
The purchase, “marks a proud moment for Canadian champions as we grow our business into a North American leader,” Mayo Schmidt, Hydro One’s chief executive, said, adding the transaction “will be accretive to earnings per share in the mid-single digits in the first full year of operation.” More importantly the acquisition offers shareholders of Hydro One “a significant and stable increase to earnings and cash flow underpinned by fully regulated utility operations.” Hydro One has promised to continue to pay out 70 to 80 per cent of its earnings as dividends.
Investors, however, were not impressed and Hydro One fell the most in eight months Thursday morning after the deal that analysts said is too costly and exposes the Canadian energy company to regulatory hassles.
“Hydro One is paying the price to gain exposure to U.S. markets,” Shahriar Pourreza, an analyst at Guggenheim Securities, said in a note Thursday. The “very rich valuation” is “likely a near-term anomaly.”
Hydro One fell as much as 5.4 per cent to $21.32 in Toronto, the biggest intraday decline since Nov. 10, before paring losses. Avista rose 20 per cent to US$51.83 in New York.
If and when the transaction closes — and the two parties are targeting the second half of 2018 — the combined entity will have an enterprise value of $31.2 billion, and assets of $32.2 billion. It will rank in the Top 20 North American utilities that are focused on regulated transmission, electricity and natural gas local distribution and serve more than two million retail and industrial customers.
In entering the U.S., Hydro One is following the lead set by two East Coast utilities, Newfoundland-based Fortis Inc. and Nova Scotia-based Emera Inc.
And Hydro One is following the lead set by those two entities in the way it finances such acquisitions: it is selling $1.4 billion of 4 per cent convertible debentures represented by instalment receipts.
In that structure, investors will be paid one-third of the cost of each $1,000 debenture on closing with the balance ($667) being paid at a future date when all the conditions have been met. As a result, holders will receive an effective 12 per cent yield on the first installment. The rest of the purchase price will come from placing US$2.6 billion of debt.
When the transaction closes, Avista will be run as a Spokane-based stand-alone company. Synergies between the two companies are expected to be small given that “no workforce reductions” are planned. Instead efficiencies will flow through “enhanced scale, innovation, shared IT systems and increased purchasing power.”