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Canadians Make Yet Another Run for the Border

It’s nice to be wanted.

A little more than a month ago, Kansas-based Westar Energy Inc. (NYSE: WR) saw its share price jump due to speculation that the utility had put itself in play.

In the five weeks since rumors first surfaced, the stock has climbed nearly 15% versus 2.6% for the Dow Jones Utilities Average. And the stock has gained more than 32% on a price basis over the trailing year, more than 2.5x the return of the utility benchmark.

Although the company has yet to make any formal announcements, insiders have been leaking details of the company’s plans and those of its potential acquirers to the media.

Last week, it was revealed that Westar has attracted the interest of at least two different suitors.

In particular, fellow Midwestern utility Ameren Corp. (NYSE: AEE) is reportedly considering making a bid.

Both Ameren and Westar boast high Utility Forecaster Safety Ratings, at 7 and 6, respectively, so a combination of the two mid-cap firms would certainly be compelling for long-term income investors. While Ameren’s dividend growth has been somewhat below average in recent years, Westar has grown its payout at an above-average pace.  

Equally noteworthy is the fact that a Canadian investor consortium, led by Borealis Infrastructure Management Inc. and Canada Pension Plan Investment Board, is also considering making an offer.

Other companies might also jump into the fray.

The initial bids were due this week, so no doubt Westar is mulling things over as we write.

But if the Canadians make a bid that proves successful, it would mark the fifth time in the past six months that our neighbors to the north have made a play for one of the U.S.-based companies in our coverage universe.

First, there was Emera Inc.’s (TSX: EMA, OTC: EMRAF) $10.4 billion bid for Florida-based TECO Energy Inc. (NYSE: TE). That deal is expected to close by the end of the second quarter.

Then the fateful day of February 9 saw the announcement of two different deals, leaving us trying to scrape our jaws off the floor.

Canadian utility giant Fortis Inc. (TSX: FTS, OTC: FRTSF) announced it had agreed to purchase the Midwestern-based transmission pure-play ITC Holdings Corp. (NYSE: ITC) in an $11.2 billion deal. The transaction is expected to close by the end of the year.

And Algonquin Power & Utilities Corp. (TSX: AQN, OTC: AQUNF) plans to buy tiny Missouri-based Empire District Electric Co. (NYSE: EDE) in a $2.4 billion deal. The transaction is expected to close by the end of the first quarter of 2017.

Actually, we never did get a chance to scrape our jaws off the floor. That’s because a few weeks later, the rumor mill started turning again—this time about Columbia Pipeline Group Inc. (NYSE: CPGX).

After suffering the humiliating rejection of the Keystone XL pipeline permit, TransCanada Corp. (TSX: TRP, NYSE: TRP) decided why build it when you can just buy it? Accordingly, the Canadian pipeline giant took advantage of the energy sector downturn by swooping in with an offer to buy CPGX for $13 billion. The transaction is expected to close by the end of the year.

The Canadians may mock our American excesses, but clearly they love us anyway (perhaps because of our excesses). After all, while the U.S. economy is hardly going gangbusters—gross domestic product growth is forecast to decelerate to just 2% this year—it still has a stronger growth trajectory than Canada.

Despite the fact that utilities enjoy the stability of regulated returns, their performance is still ultimately dependent on the underlying economy in their service territories and how that affects energy consumption. Indeed, there are cases where a utility’s actual return on equity falls short of its authorized return owing to weak demand.

Although the decline in Canada’s exchange rate makes these deals more expensive for Canadian firms, longer term it should give them an earnings boost when cash flows from their U.S. subsidiaries are translated back into Canadian dollars.

The ink had barely dried on the March issue of Utility Forecaster when the news about Westar first broke. Westar was one of nine potential takeover targets that we identified in that issue. Perhaps the Canadians are coming for the rest.

Our Super-Secret Stock Pick

In May, we’re holding our annual Wealth Summit–this year in Las Vegas. It’s a great way for us to meet you, our subscribers, one-on-one, and there are still spaces open if you’re interested.

Also this year, we’ll be making a special recommendation to those who attend the Summit, and to those who are part of our Wealth Society, whose members receive all the Investing Daily newsletters and other premium services.

It’s a fun exercise for us because there are no rules. We don’t have to pick a utility stock. In fact, our pick doesn’t even need to be a stock: It could be an alternative investment that isn’t traded on a public market.

Our publisher says we can’t reveal the pick in Utility Forecaster, or even to him before the Summit. But in the weeks ahead, we’ll let you in on some of the research we’re doing to identify this exclusive pick.


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