Analysts: Wisconsin Energy, Integrys combo makes solid strategic sense


Wisconsin Energy (WEC +1.9%) regains some of yesterday's 3.5% loss following its acquisition of Integrys (TEG +1.5%) for $71.47/share, which represents a 17.3% premium to Friday's closing price.

Wells Fargo upgrades WEC to Outperform and raises its target price for shares to $50-$51 from $49-$50, believing the deal makes strategic sense given synergies associated with geographic fit and potential opportunities via an increased ownership in Wisconsin transmission grid owner ATC; however, CRT Capital cuts its WEC target price to $44 from $48, citing subsequent increased regulatory risk and potential year-long overhang (Briefing.com).

For TEG shareholders, the deal brings a healthy 17% premium and they’re getting shares in a very solid company, says Morningstar's Charles Fishman.

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Comments (10)
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    Well let's not forget the 7 law firms looking into the deal trying to answer was it the best deal for shareholders of TEG?
    24 Jun 2014, 04:45 PM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    Moody's downgrades WEC for the purchase, while Wells Fargo gives it an upgrade.
    IMO, the deal favored WEC more than TEG shareholders. A 20%-25% premium would have been more equatable with a higher per share trade for TEG shares. There was a $21 dollar difference in share price and a double in dividend payout on the TEG side. So do I have to wait 10 years or longer for the dividend to match TEG's?

     

    TEG was a long term annual income play, not so much a capital appreciation play.
    In that regard, this share owner got the shaft.
    24 Jun 2014, 10:41 PM Reply Like
  • Greyfox070
    , contributor
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    Pretty much agree with your last sentence. I liquidated my DRIP today after 11 great years. I have a hefty gain, so no hard feelings.
    25 Jun 2014, 01:03 AM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    Greyfox070:

     

    I don't understand your reasoning. The deal will not close for over 1 year and you just kissed one year of dividends from TEG goodbye. You may have gotten the equivalent $18.58 cash payment (close), but you also lost .128 shares extra of WEC stock that you could have sold after the deal closed, that's $5.889 (assuming WEC trades at $46) for every share of TEG you would have swapped.

     

    I don't walk in your shoes, so that may have been the right thing for you to do, but it isn't the right thing for me to do.

     

    Good luck.
    1 Jul 2014, 11:46 PM Reply Like
  • Greyfox070
    , contributor
    Comments (201) | Send Message
     
    Gabby:

     

    Honestly, its related to my tax situation vis a vis capital-loss carry forwards. I still think I made the right call...my sale price was 69.997 - I'm considering re-investing some principal in $MGEE.
    2 Jul 2014, 04:26 AM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    Ah---haa!

     

    Thanks for the comment, that cleared away the fog.
    I sometimes forget that not everyone trades in a tax deferred account and from your perspective I can now understand the reasoning. I haven't traded in a taxable account in more than 30 years so that was never a consideration to understanding what you were seeing that I may be missing.
    Thanks again for clearing that up for me.
    2 Jul 2014, 09:21 AM Reply Like
  • Greyfox070
    , contributor
    Comments (201) | Send Message
     
    Gabby:

     

    I too trade mostly non-taxable, but if a solid company has a DRIP I certainly try to take advantage of it. Fees are lower and annual maximums are much higher.
    2 Jul 2014, 01:14 PM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    I have a core position is TEG and I have a trading position that I use to augment the return. If TEG is high and ED is low, I buy the ED for a trade to sell when the capital gain equals two years of dividends. If TEG trades low I use the capital gain and initial position of ED to buy more TEG for a trade. When the capital appreciation hits two years of TEG dividends, I sell.
    Basically I keep the cash, waiting to buy round lots of 100 shares to add to TEG core. It is my own DRIP but at lower share prices than a true DRIP.
    Obviously that all went down the drain with this buyout. I have no desire for this deal to go through as it sucks more than a vacuum cleaner when you work the numbers out 7 years. You have a loss in dividend income, and a loss in capital appreciation compared to the TEG dividend and capital gain.
    If one were to receive $18.58 cash and 1.33 shares of WEC then in 7 years it would be a positive exchange, assuming WEC can increase their dividend payout to what is TEG's now in that 7 years. That's a big "IF."
    Good intentions are not reality, and to my knowledge they have no working crystal ball to side step all the "Gotchas" over the next 7 years.
    Capital appreciation only means something to heirs if you setup for annual income, which is the key for most retirees. I looked at TEG as a bond fund, collecting the coupon yearly while the appreciation value cycles like a Yo-Yo.
    What I add to the core is an inflation fighter for the income stream, similar to a TLT bond fund.
    3 Jul 2014, 10:57 AM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    This connection bothers me.
    My problem with the WEC deal for TEG is income, that is, the loss of income. Whether TEG trades at $61 or $51 while I’m alive has no bearing since until I sell it, it is an unrealized income gain or loss. If I had a 10 year CD that paid a coupon of $2720 per year (1000 share equivalent) at the end of the 10 years I would have received by initial purchase price (principal) and collected $ 27,200 in interest, as income over those 10 years.
    Assuming you believe the WEC company line that they will increase dividends 7%-8% for the foreseeable future and eventually equal the dividend TEG is paying now, I’ll show the calculations using the lower guidance of 7%.
    It will take a year before the deal closes, meaning I will collect the TEG dividend, not the $1.56 dividend of WEC. However, taking WEC’s word of increasing dividends the dividend will be $1.66 at the start of the conversion a year later. They also stated after two years they would be to a $2.00 dividend. We also get .128 shares extra or 1.128 shares for every share of TEG. Using 1000 shares makes the calculations less cumbersome for this example.
    Year 1 at conversion: $ 1.66 x 1128 shares = $ 1872.48 versus $ 2.72 x 1000 = $ 2720.
    Year 2------------------ $ 1.78 x 1128 shares = $ 2007.84 versus $ 2.72 x 1000 = $ 2720.
    Year 3------------------ $ 1.91 x 1128 shares = $ 2154.48 versus $ 2.72 x 1000 = $ 2720…almost $2.
    Year 4------------------ $ 2.04 x 1128 shares = $ 2301.12 versus $ 2.72 x 1000 = $ 2720.
    Year 5------------------ $ 2.19 x 1128 shares = $ 2470.32 versus $ 2.72 x 1000 = $ 2720.
    Year 6------------------ $ 2.34 x 1128 shares = $ 2639.52 versus $ 2.72 x 1000 = $ 2720.
    Year 7------------------ $ 2.51 x 1128 shares = $ 2831.28 versus $ 2.72 x 1000 = $ 2720.
    Total = $ 16,277.04 versus $ 19,040.00

     

    Year 8------------------ $ 2.69 x 1128 shares = $ 3034.32 versus $ 2.72 x 1000 = $ 2720.
    Year 9------------------ $ 2.88 x 1128 shares = $ 3248.64 versus $ 2.72 x 1000 = $ 2720.
    Year 10---------------- $ 3.08 x 1128 shares = $ 3474.24 versus $ 2.72 x 1000 = $ 2720.
    Year 11---------------- $ 3.30 x 1128 shares = $ 3722.40 versus $ 2.72 x 1000 = $ 2720.
    Total = $ 29756.64 versus $ 29920.00

     

    This is unacceptable. The only way this makes sense is if the additional shares were higher than 1.300 and not 1.128.

     

    Year 1 at conversion: $ 1.66 x 1300 shares = $ 2158.00 versus $ 2.72 x 1000 = $ 2720.
    Year 2------------------ $ 1.78 x 1300 shares = $ 2269.50 versus $ 2.72 x 1000 = $ 2720.
    Year 3------------------ $ 1.91 x 1300 shares = $ 2435.25 versus $ 2.72 x 1000 = $ 2720…almost $2.
    Year 4------------------ $ 2.04 x 1300 shares = $ 2601.00 versus $ 2.72 x 1000 = $ 2720.
    Year 5------------------ $ 2.19 x 1300 shares = $ 2792.25 versus $ 2.72 x 1000 = $ 2720.
    Year 6 ----------------- $ 2.34 x 1300 shares = $ 2983.50 versus $ 2.72 x 1000 = $ 2720
    Year 7------------------ $ 2.50 x 1300 shares = $ 3250.00 versus $ 2.72 x 1000 = $ 2720
    Total = $ 18746.00 versus $19040.00
    The 8th year and there on, one is ahead of the game, however that is still unacceptable.
    A reasonable period would be 5 years, and thus a higher fractional share would be required, or closer to 1.475 shares per share of TEG.

     

    The differential in share price at the announcement was WEC trading at $46 and TEG trading at 61.00
    That means 1.33 shares of WEC = 1 share of TEG. At a premium 17%, or $71.47 then it would equal 1.55 shares of WEC. The difference in dividend would be ($1.56) 1.74 shares of WEC to equal the dividend of 1 share of TEG ($2.72).
    Unless they increase the fraction share amount, I’m voting this deal down. It is obvious it is more to the advantage of WEC for this deal to proceed then it is for TEG. If you look at the income stream, under the present deal I’m further ahead if the deal goes south, and with the announcement that the state of Wisconsin is selling their state owned power plants it may just do that. I suspect taking control of that system would be a plum for WEC since they are based in Wisconsin.
    1 Aug 2014, 01:59 AM Reply Like
  • gabby1945
    , contributor
    Comments (2474) | Send Message
     
    How can I make this work to my benefit when the numbers (shares of stock, dividend differential, and 17% capital premium) just don’t add up (income wise) ?

     

    What can I change and what is written in stone? What would I do if TEG split their dividend and had a 2 for 1 stock split, and how would that benefit or hurt me? The answer is simple, it makes no difference to my income just the number of shares I hold to get that same dividend. That’s when the light went off……increase the number of shares.

     

    We are getting a cash payment of $18.58/share. Why can’t I use that payment to buy more shares of WEC to offset the dividend differential, and how long would I have to wait for equality in income? I decided to run the numbers on a 1000 share basis for an easy computation using 1.128 shares as the determining factor (1000 x 1.128 = 1128 shares).
    The high for WEC to date was $48, and at the time of the announcement it was $46.
    My assumption for this exercise is WEC share price = $46. If the price is lower at conversion time I’ll get a couple more shares. 1000 shares times $18.58 = $18,580 to buy WEC shares (403.913 = 403, call it 400 shares).
    400 shares plus 1128 shares = 1528 shares or approximately 1500 shares (I like round numbers).

     

    Year 1 at conversion: $ 1.66 x 1500 shares = $ 2490.00 versus $ 2.72 x 1000 = $ 2720.
    Year 2------------------ $ 1.78 x 1500 shares = $ 2670.00 versus $ 2.72 x 1000 = $ 2720.
    Year 3------------------ $ 1.91 x 1500 shares = $ 2865.00 versus $ 2.72 x 1000 = $ 2720…almost $2.
    Year 4------------------ $ 2.04 x 1500 shares = $ 3060.00 versus $ 2.72 x 1000 = $ 2720.
    Total-------------------- $11085.00 versus $ 10880.00
    The end of the 4th year the income stream balances out with a slight WEC gain ($ 205).

     

    It will take 4 more years at a 7% annual dividend growth rate to reach the $ 2.72 rate of TEG.
    Year 5------------------ $ 2.19 x 1500 shares = $ 3285.00 versus $ 2.72 x 1000 = $ 2720.
    Year 6 ----------------- $ 2.34 x 1500 shares = $ 3510.00 versus $ 2.72 x 1000 = $ 2720
    Year 7------------------ $ 2.50 x 1500 shares = $ 3750.00 versus $ 2.72 x 1000 = $ 2720
    Year 8------------------ $ 2.68 x 1500 shares = $ 4020.00 versus $ 2.72 x 1000 = $ 2720
    4 year Total = $ 14565.00 versus $ 10880.00 or a $ 3685.00 gain over TEG dividends at basically the same rate of $2.70. That is an average yearly gain of $ 921, or as it stands at this 8 year mark, I have increased my income by 47.8% compared to the TEG annual dividend on 1000 shares.

     

    Conclusion: This manages to equal the income stream of TEG dividends in less than 5 years, supersede the magnitude of TEG dividends in 4 years with an almost 48% increase in income through the 8th year.
    Now that’s more like it…I’m paid to wait 4 years for an increase in income stream that averages 12% per year. Now we just need to hold WEC managements’ feet to the fire to maintain their statement of 7% annual dividend growth.
    1 Aug 2014, 10:20 PM Reply Like
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