UNS Energy - Tender After A Big Premium For A Utility Deal

| About: UNS Energy (UNS)

Investors in UNS Energy (NYSE:UNS) are having a great day after the company agreed to sell itself to Canadian-based Fortis. Investors receive a very big premium for a takeover in a utility name.

The deal will furthermore give UNS much needed capital access ahead of the big future investments needed to meet clean energy requirements. I would advise investors to tender, and take your profits after a great run.

The Deal

UNS Energy announced that it has reached a merger agreement with Canadian-based Fortis. Under terms of the deal, investors in UNS will receive $60.25 per share in cash.

The $4.3 billion deal values equity in UNS around $2.5 billion, while Fortis will furthermore assume $1.8 billion in debt.

UNS will remain a standalone company within Fortis, remaining headquartered in Tucson, Arizona. The financial strength of Fortis will improve the access for UNS to fresh capital. Fortis will furthermore inject $200 million to bolster the balance sheet of UNS and fund the purchase of Unit 3 at the natural gas Gila River plant.

CEO and Chairman Paul Bonavia commented on the sale to Fortis, "Joining the Fortis family will provide UNS Energy with new financial strength, helping us maintain safe, reliable and affordable service for our utility customers as we address the capital-intensive challenges facing our industry."

The deal will have to be approved by shareholders in UNS early next year. The transaction is furthermore subject to regulatory approval and anti-trust approval. Of course, the deal is subject to other closing conditions, and eventually UNS anticipates that the deal will close before the end of 2014.


Back at the start of November, UNS released its third quarter results. The company ended the quarter with $72.4 million in cash and equivalents. Total debt stands at $1.83 billion, for a fairly high net debt position.

Revenues for the first nine months of 2013 came in at $1.13 billion, up 1.9% on the year before. Earnings rose by 36.6% to $114.0 million in the meantime. At this pace, annual revenues of $1.5 billion are within reach as earnings are seen around $3 per share, or around $125 million.

The $4.3 billion valuation is a bit steep in this respect. This values the enterprise at 2.9 times annual revenues. The firm's equity is valued around 20 times earnings in the deal.

Investors in UNS receive a quarterly dividend of $0.435 per share, yielding 3.8% before the deal has been announced. The yield, based on the $60.25 offer price, is about 2.9%.

Some Historical Perspective

Long-term holders in UNS have seen very decent returns. Over the past decade, shares have mostly traded in a $25-$35 trading range, while investors receive fair dividend yields. Shares rose to $40 at the end of 2012, and now investors stand to receive some 50% more for their holdings.

Between 2009 and 2013, UNS has steadily increased its annual revenues from $1.4 billion to an estimated $1.5 billion. Earnings came in around $90-$110 million in recent years, and are seen at levels above the range in 2013.

Despite the stagnating returns, shares have risen. The solid dividend yield of 4% before the deal has been announced, combined with the low interest rate environment, have pushed up prices of "fixed-rate" investments, including utilities.

Investment Thesis

For investors in UNS this is probably a good deal. The lower interest rate environment has already sent shares higher in recent years, and investors receive a fat premium of nearly 34% for their holdings on top of that.

For UNS a sale to a company with greater access to financing was needed. Through 2014 and 2015, the company is on track to spend a lot of cash. By the end of 2014, the Gila River Unit 3 will need to be purchased, while the company will furthermore need to make sizable investments related to its Springerville assets in 2015.

On top of that, earnings growth is seen into 2014, with earnings seen around $3.30 per share, valuing operations at 18 times next year's earnings. This seems a very fair multiple, especially with the investment requirements coming up. UNS still relies on coal for two-third of its electricity generation, with 30% being generated through natural gas. Additional investments are needed to make sure renewable sources will generate at least 15% of total electricity production by 2025, as required by state regulators.

Shares are currently trading around $59 per share, at roughly 2% discount compared to the offer price. The key risk to the deal is obtaining regulatory approval, always a slightly bigger issue in utility deals. The regulators in Arizona rejected a takeover of the firm almost a decade ago, led by investment firm KKR.

For the Canadian firm, the proposed deal marks the second U.S. deal this year. Earlier this year, it bought CH Energy for nearly a billion. U.S. acquisitions give Fortis better opportunities compared to Canada, where utilities are owned by governments. Arizona furthermore offers above-average economic growth, driven by solid population growth.

As such, it is probably a solid deal for investors in UNS. While you can always await the $60.25 in cash hitting your bank account at some point next year, take your homerun and sell around $59, forgiving a little interest. There is always a slight risk if the deal falls through on regulatory approval.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.