InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

$1,230 in Instant Income?

$1,230 in Instant Income?Our top income expert recently pulled the wraps off his breakthrough moneymaking technique. And he proved beyond a shadow of a doubt how you can use it to generate instant cash payouts of up to $1,230 (or more). Over and over again. But then he took things a big step further and guaranteed you can make $1 million by following his program. And the second he did, our phones went nuts! Space is limited — get the details here.

 

 

The M&A Guessing Game: Who’s Next?

By Ari Charney on September 16, 2016

When hunting for new investment ideas, sometimes the data can take you to unexpected places.

For instance, with the utility sector approaching a formal correction, I ran a screen to see if any top-rated names were trading at compelling valuations again.

In scrutinizing the data, however, I realized that perhaps there might be a more intriguing idea than one based on mere valuation.

One of the major utility-sector investment themes over the past year has been what we like to refer to as the Great Gas Grab. Faced with weak or declining electricity demand, three utility giants, Southern Company (NYSE: SO), Duke Energy Corp. (NYSE: DUK), and Dominion Resources Inc. (NYSE: D), have made deals to acquire regulated gas distributors.

Both Southern and Duke made plays for gas utilities whose service territories largely overlap with or are adjacent to their own. That’s caused us to joke that we should probably just overlay maps of the remaining standalone gas utilities’ service territories with those of nearby electric utilities to see who might make a deal.

By contrast, Dominion’s transaction was for a company on the other side of the country, with the main prize being gas transmission assets that it hopes to drop down to its MLP subsidiary, while the gas distribution business that’s part of the deal is simply gravy. So when it comes to the Great Gas Grab, Dominion’s deal should probably get an asterisk.

Regardless, it’s clear that with the regulatory push toward cleaner energy, natural gas assets will continue to be in high demand. Utilities are increasingly leaning on the cleaner-burning fuel to provide dependable power generation now that coal is being phased out. And that means gas utilities offer potential acquirers a growing stream of regulated earnings.

Unfortunately, the Great Gas Grab pushed already elevated gas utility valuations to absurd multiples over the past year. The pool of publicly traded pure-play gas utilities is tiny, so once investors realized the sector was in play it didn’t take long for money to pour into the space. And that’s probably stymied subsequent deal-making.

But with the sector’s recent selloff, a couple of gas utilities are approaching more reasonable valuations again. One, in particular, caught my eye, because its main service territory happens to be in the same state of an electric utility that also popped up on our list. In fact, both companies are headquartered in the same city.

Matchmaker, Matchmaker

The gas utility in question is Spire Inc. (NYSE: SR), the holding company formerly known as Laclede, while the possible electric utility suitor is Ameren Corp. (NYSE: AEE), both of which are domiciled in St. Louis, Missouri.

The $11.8 billion Ameren derives the vast majority of its revenue from electric distribution. But about 15.1% of revenue comes from gas distribution, with about 816,000 gas customers in Illinois and about 130,000 gas customers in southeast, central, and eastern Missouri.

Ameren reportedly was in negotiations to acquire fellow Midwestern utility Westar Energy Inc. (NYSE: WR), but Great Plains Energy Inc. (NYSE: GXP) ended up making the winning bid.

So although Ameren’s CEO was coy about plans for future M&A in the company’s recent earnings call, we know that organic growth isn’t the only thing on his mind.

Ameren also has relatively low leverage compared to its peers, based on a net debt to EBITDA (earnings before interest, taxation, depreciation and amortization) ratio of 3.4 and a debt-to-equity ratio just shy of 107%. So it has the capacity to acquire a company about the size of Spire.

Meanwhile, the number of potential acquisition targets continues to dwindle, given recent deals by competitors to acquire other small utilities that operate nearby, such as the aforementioned Westar deal, as well as the pending acquisition of Missouri-based Empire District Electric Co. (NYSE: EDE) by the Canadian infrastructure company Algonquin Power & Utilities Corp. (TSX: AQN, OTC: AQUNF). And most of the rest of the Midwest has already been sewn up by various utility giants.

The $2.8 billion Spire could, therefore, be a tempting target for Ameren. Based on a forward price-to-earnings ratio of 18.2, the gas utility is currently the cheapest stock among its peers.

Spire has a relatively low debt-to-equity ratio, at around 108%, but leverage is still a bit high, based on a net debt to EBITDA ratio of 4.7. The latter number is likely elevated owing to debt taken on in the pursuit of M&A. Fortunately, it’s been coming down quickly.

The holding company’s gas utilities serve 1.1 million gas customers in Missouri, in and around St. Louis as well as the eastern and western parts of the state. In recent years, it also diversified into the Southeast by acquiring Alagasco, which serves 420,000 gas customers in Alabama.

So the two firms’ Missouri gas infrastructure would presumably be complementary, allowing for the realization of some cost-saving synergies.

The main wrinkle is that Missouri has one of the more challenging regulatory regimes, though politicians, regulators, and stakeholders could be close to making key changes to streamline processes.

In the meantime, the situation has prompted Ameren to focus on the more constructive relations it enjoys in its Illinois service territories, as well as the higher authorized returns it can earn from electric transmission infrastructure there.

Even so, we wouldn’t be surprised if Ameren has had at least some informal discussions with its fellow St. Louisan about a possible merger.


You might also enjoy…

 

Forget Buy and Hold. Here’s how to retire faster…

I’m not a fan of “buy and hold.” Gurus like to tell you that patience is the key, but I call horse puckey.

We’ve discovered an investing technique that consistently pays out easy-to-repeat profits.

One that’s proven to beat the market 2,082% in head-to-head testing.

And one that’s generated over 488 winners since 2011.

This method is so powerful, in fact, some of the investors we’ve let use it reported back to us saying they’ve made $71,425… $82,371… and even as much as $151,000 in a single year thanks to this “trick.”

That’s how powerful this investing technique is!

What what exactly is this mysterious method? I’ve put all the details together here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.