Potential Takeover Targets: Utilities

Includes: AEE, DUK, EXC, LNT, SCG, SO, WEC
by: Matthew Smith

Utilities are usually considered an asset class where you expect to receive healthy dividend yields and minimal capital appreciation. It is what many consider a ‘widows and orphans’ type of investment and lacks the excitement of industries such as tech and biotech. There are a few players within the industry that could see excitement in their shares as they are potential takeover targets of larger peers. Here are a few:

SCANA Corporation

SCANA (NYSE:SCG) is the largest utility in South Carolina, controlling the Columbia, and Charleston, metropolitan areas. The company is a large producer of nuclear energy and owns a natural gas distribution business. SCG’s natural gas business spans three states; South Carolina, North Carolina, and Georgia. SCG also runs a tower business and owns over 2200 miles of fiber.

Long rumored as a takeover target, SCANA would be a nice fit with only two players now. Due to its geographic footprint, generating facilities and the consolidation that has already taken place around it, we think that Duke Energy (NYSE:DUK) and The Southern Company (NYSE:SO) would be the logical pursuers in any acquisition. SCG is a $5.3 billion market cap utility, and both Duke (at $26.5 billion currently, and larger after the closing of the Progress Energy acquisition) and The Southern Company (at $36.6 billion) would have no problem swallowing the smaller SCG.

Duke makes more sense as an acquirer as the acquisition would further cement its footprint in a geographic area, which it already either controls (North Carolina) or is a big player in (South Carolina) with the gas customers in Georgia, a consolation prize. At the moment Duke is not in a position to go after another acquisition, but as soon as it closes the Progress Energy deal and gets its house in order, this is a deal that would mirror the logistics of the PGN acquisition.

The other logical suitor, The Southern Company, is the other neighbor of SCG. The only overlap in the two companies’ footprints are the gas customers in Georgia, where SO is based. SCG would be a nice bolt-on acquisition for SO and based on the size of SCG would be very doable. Unlike DUK, SO would most likely experience less stringent overview from regulators as it would not be consolidating within one area for the most part.

SCANA is landlocked between these two companies, which provides it with little opportunity for growth or expansion of its operating footprint. This fact may very well make SCG a desirable target for its neighbors, who could realize significant economies of scale and create cost savings that would benefit both customers and shareholders.

Wisconsin Energy

Wisconsin Energy (NYSE:WEC) is a $7.45 billion market cap utility based in Milwaukee, Wisconsin. The company serves markets in Wisconsin, and Michigan, (the Upper Peninsula) and provides natural gas in Wisconsin. The company also owns just over 26% in a wholesale electric transmission business.

Exelon (NYSE:EXC) is just south of Wisconsin Energy’s largest customer base via its Commonwealth Edison (ComEd) subsidiary serving the Greater Chicago area. As Duke Energy has done, this bolt-on acquisition could result in cost savings for EXC and help as the industry adopts to new rules the federal government has laid out (think power mix). Also of interest for EXC could be the wholesale electric transmission business, which one would have to believe EXC could help expand. A purchase of WEC would not be hard for EXC to swallow as it has a market cap of $28.65 billion and a very capable management team.

Another interesting way for consolidation with WEC would be a merger of equals with Ameren (NYSE:AEE), a big player in Illinois, with territory covering most of the state, including Springfield, Decatur, and Peoria. A combined entity could cut executive level expenses and realize economies of scale by streamlining maintenance and work crews. One would imagine that cutting white collar jobs would be where most of the cost savings were realized however.

Alliant Energy Corporation

Alliant Energy (NYSE:LNT) is a utility holding company with assets in Wisconsin, Iowa, and Minnesota. LNT owns Iowa Power & Light as well as Wisconsin Power & Light. Alliant, a $4.5 billion market cap company would be a nice add on for the regional players, and at its current price makes it an attractive target for many players. The company also owns 16% of a transmission business among utilities in Wisconsin.

Ironically one of our picks as a potential buyout candidate could be a buyer of Alliant. Wisconsin Energy could see Alliant as an opportunity to fill in its footprint both in Wisconsin, cutting costs across the board and giving it the 2nd largest market in the state, Madison. The 16% stake LNT owns in the transmission business would also enable WEC to control a larger interest in the business. Furthermore an acquisition of LNT would enable WEC to enlarge its regional footprint (those areas that are outside of Wisconsin).

Although SCANA is the only company that continually shows up in the rumor mill as a serious takeover candidate, we believe that the utility holding companies may undergo some serious consolidation in the face of mounting environmental regulations and requirements that they increasingly add renewable energy to generating capabilities. The above companies represent attractive takeout opportunities based on recent consolidation within the industry as well as historical consolidation benchmarks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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