Puget Energy Update: Merger Is Currently On Track

I wasn’t planning to write an update on the Puget Energy (PSD) arbitrage but a reader asked for my opinion on how I currently see the PSD merger so I’ll share it with everyone else and try to provide additional information.

Reminder Points

If the deal is approved, each share of PSD will be converted to $30 cash.

The deal is being financed by a “consortium of long-term infrastructure investors led by Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation and also includes Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Capital Group (collectively, the Consortium).”

All approvals have been received and the only process remaining is for reply briefs to be submitted by Oct 23 so that the UTC can review it and make a decision.

Price as of this writing is around $22.40 with a spread of just under 33% with about 1 week remaining which is an annualized profit of 1488%!

Along with every other company out there, Puget Energy was thrown out during the market meltdown.

Odds of the Merger

I’m going to do something very similary to what Sivaram from Can Turtles Fly has already done.

Upside Potential: 33%

Downside Potential: 10%

Probability of Success: 90%

Probability of Failure:10%

Time Frame: 1 week

From the odds that I’ve applied to the situation, this could be highly profitable.

Additional Details of the Merger

Back in July 23, PSD filed a multiparty stipulation involving Puget Holdings, Puget Sound Energy, Staff of the Washington Utilities and Transportation Commission, Industrial Customers of Northwest Utilities, Northwest Industrial Gas Users, The Energy Project, NW Energy Coalition, and The Kroger Company (KR). A month later, on August 25, all but one of the issues have been agreed upon.

However, reading the appendix from the exhibits, it is clear to me that this one issue should not prevent or upset the merger. All parties, including the UTC staff, have basically given the OK for the merger to be approved. Even though PSD has a lot to agree upon in the stipulation, I don’t see anything outrageous.

On Oct 9, a filing made by PSD reveals that capital has been committed and ALL approvals have been obtained. All that remains is a review of the reply briefs if they are submitted by Oct 23. This leaves 1 week for an announcement by the UTC.

Insiders have also been vesting their options without any of them selling or exercising. It’s always important to see how insiders view the merger and interviews and actions of insiders confirm that the merger is a high priority in 2008 and they all want to see it go through.

Risks

At this point, I only see that truly unpredicatable occurrences, which the company has no control over, is the only thing that can upset the deal.

Completition Checklist

1. Due diligence by both parties: Yes
2. Financing and regulator approval:  Yes
3. Get preliminary shareholder sentiment (or controlling shareholder approval):  Yes
4. Obtain regulator (SEC, FCC, any and all) approval: Yes
5. Get final shareholder approval at a meeting called for that purpose: Yes
6. Insiders continually vesting or buying shares:  Yes

Conclusion

The market being what it is, irrationality has allowed the price to drop from the mid $27 to the mid $22 which is actually below pre-merger announcements. Even if by freak of nature the deal is canceled, the company offers a dividend yield of 4.5%. Not to mention that this is a reliable utility especially in times of a recession.

I don’t believe I’ve ever seen such an advantageous arbitrage opportunity as this one.

Disclosure: Entered into a 1/2 position at $22.50 and looking to add the remaining half between the range of $21.6 - $22.50.

Comments

[Glenn Blackmon]

Your time frame of one week is unrealistic. Parties in the regulatory proceeding will submit their final written briefs in that time frame (Oct. 23), but the regulators will not make an immediate announcement. They will take an unknown period of time to evaluate the evidence and arguments and prepare a written order.

2008 Oct 20 09:48 AM

[Jae Jun]

Yes 1 week is incorrect. I've stated that on my blog.

2008 Oct 22 02:55 PM

[Jae Jun]

but an unknown period of time is also unrealistic.

2008 Oct 22 02:56 PM

[mwm711]

Does not public counsel's unabashed opposition to this deal present a significant obstacle?

2008 Oct 23 06:42 AM

[Jae Jun]

No as the opposition from the public counsel is nothing more than a delay tactic. The deal meets the Commissions "no harm" standard.

Refer to the 6th point in the document.
www.wutc.wa.gov/rms2.n...

2008 Oct 24 02:17 AM

[mwm711]

But why is the stock dumping and been dumping with big lots if approval is imminent?

2008 Oct 28 11:23 AM

[Jae Jun]

Who knows. The same could be asked about the stock market in general and the answer would be irrationality and fear. The merger was announced 1 year ago, and on Wall Street, 1 year is considered a lifetime.

2008 Oct 28 01:41 PM

[samputa]

It seems to be that this deal is based on the opinion of the commission of the WUTC if this deal does or does not contain too much financial risk, which could potentially affect the customers by either lesser quality service or higher prices.

Does anyone know if the commission has decided on a similar situation before and how it acted?

2008 Nov 01 10:24 AM

[Jae Jun]

I plan to write a further update based on additional information I have gathered. Hopefully get to it soon. Will be on my blog oldschoolvalue.com soon.

2008 Nov 02 01:51 AM

[trimagna3]

I just read an article
www.pnwlocalnews.com/w...

Basically, communities can start their own utilities, can seize PSE's (subsidiary of PSD) hardware and provide electricity from the Bonneville Power hydroelectric grid at a cheaper price.

Ostensibly this is because they object to foreign ownership. MacQuarie is Australian (?).

PSD thinks this customer revolt is serious. It might kill the deal.

2008 Nov 02 03:36 PM

[Jae Jun]

I dont know about killing the deal as the Consortium (yes Mac is Australian) still wants to consummate the deal.

Need to work on the next update that will hopefully answer questions or raise further ones.

2008 Nov 02 11:03 PM