Utility stocks tend to move in a tight band, but Duke Energy’s DUK 7.01% shares surged 7% early Wednesday after The Wall Street Journal reported that NextEra Energy, NEE -1.97% the largest utility in the U.S., made a takeover approach. The enthusiasm looks premature.
The two utilities combined have a market capitalization of roughly $200 billion, larger than Exxon Mobil. But the chances of all the stars aligning for the deal are slim: Duke has reportedly turned down the approach and a hostile takeover would be costly. Even if the two utilities were to reach a deal, they still would have to gain approval from state public utilities commissions, which are notoriously difficult to please.
What might make more sense is snapping up just part of the company as Duke Energy operates in six states. But even getting a deal through one state regulator is complicated. NextEra should be familiar with those snags. In 2017, it failed to acquire Oncor Electric, which is just a fraction of Duke Energy’s size, because it couldn’t come to an agreement with the Public Utilities Commission of Texas. Just a year before that, regulators in Hawaii blocked NextEra’s attempt to acquire the even smaller Hawaiian Electric Industries.
It is also difficult to imagine how NextEra could pay for such a large purchase without racking up significant debt, especially if it pursues a hostile takeover. Despite its large market capitalization, NextEra’s balance sheet holds just $1 billion of cash and has relatively high leverage with net debt to earnings before interest, taxes, depreciation and amortization of 4.5 times. It would have to tread carefully, as regulators are sticklers about making sure that the utilities involved in takeovers maintain investment-grade credit ratings.
Whatever deal passes regulatory muster might not end up looking that attractive anyway. Utility regulators are either appointed by governors or elected. Out of political necessity, they will make sure a deal clearly offers benefits to ratepayers. Those costs can be steep: In 2016, a consortium of infrastructure funds only managed to persuade Louisiana regulators to approve a $3.4 billion purchase of Cleco Corp. after it agreed to pay $136 million in customer credits and promised not to seek a rate increase for three years.
There is nothing like deal talk to spark excitement in the otherwise staid world of utilities. Right now, the deal only looks splashy on paper.
Write to Jinjoo Lee at [email protected]