TOPEKA – A utilities analyst said Thursday that inflexibility from Westar Energy and Great Plains Energy toward the Kansas Corporation Commission doomed the utilities’ attempt to merge.
“In similar mergers, companies are usually able to make concessions and ultimately reach an agreement,” said Andy Pusateri, of Edward Jones.
Westar’s stock plummeted as markets opened Thursday, a day after the KCC defied expectations from many local leaders and blocked the company’s sale to Great Plains. By 3:10 p.m., the stock was trading for $50.86, a 7.71 percent decline from Wednesday’s close of $55.11. The stock opened Thursday morning at $51.15.
Great Plains stock remained relatively flat at 29.58, up $0.07 (an increase of 0.24 percent).
KCC commissioners Pat Apple, Shari Feist Albrecht and Jay Emler voted 3-0 Wednesday to reject a $12.2 billion deal they deemed “too risky.” The commissioners spent two months reflecting on thousands of pages of documents and seven days of testimony they heard in early February.
Pusateri said the stock drop wasn’t unexpected after the KCC denial because it had been trading high on expectations of the acquisition. He said it was likely Westar’s stock would return to be in line with where it was a year ago, although it likely would be higher than that $53 price because utilities, in general, have gone up.
Many in Topeka — from city leaders to Westar employees — who spoke of Westar’s acquisition by Great Plains referred to it as a “done deal.” But Pusateri said the fact that the stock never reached the expected acquistion price of $60 per share showed the “market felt there was risk.”
It is relatively rare, however, to see an acquisition of this size fail, he said. That said, there have been several failures in recent history, including when Texas regulators last week stopped a bid by NextEra Energy to buy Oncor Electric, said Moody’s Investors Service associate vice president Jairo Chung.
What does stand out about the Great Plains-Westar deal is that the rejection was based on the price and the amount Great Plains was paying above Westar’s value, referred to as the acquisition premium, Chung said.
“Maybe that is because of the size of Great Plains as a stand-alone company acquiring a similar-sized company,” she said. “So rather than it being mergers of equal, this was an acquisition by one company to another.”
High premiums have been paid in other energy acquisitions, but they typically have been large companies with much larger balance sheets.
Moody’s had warned Great Plains in a letter during the sale process that the company likely could be downgraded because of the debt it was taking on.
In an assessment of the Westar-Great Plains failure that Pusateri made for Edward Jones, he noted the apparent inflexibility of Great Plains and Westar in dealing with the KCC.
“There was a high level of uncertainty related to the deal going through given the Staff’s recommendation and the two sides’ inability to settle,” Pusateri wrote. “However, we are still somewhat surprised by the decision.”
While KCC staff opposed the deal, that isn’t uncommon, Pusateri said.
“In the final order, the Commission pointed out Great Plains’ and Westar’s inability to be flexible, and we believe that ultimately kept any further negotiating from happening,” he wrote.
Pusateri noted other bidders had shown interest initially in buying Westar, but that doesn’t mean they are still interested.
“We do think the possibility of an acquisition by another company is possible, but it’s difficult to predict what companies may be interested and what price they would be willing to pay,” he said. “We believe the Commission may be more open to an acquisition by a larger company who could more easily absorb an acquisition premium.”
Edward Jones maintained its “hold” recommendation for Westar shares.
“We believe potential upside from another merger is balanced by the below-average earnings growth outlook on a stand-alone basis,” Pusateri said.
Chung said she sees no far-reaching effects for either company from the failed acquisition.
“As stand-alone companies, from our perspective, they were very stable companies to begin with and they should withstand any sort of transition period,” she said.
A year ago, Westar’s stock was valued at $49.88. The price began rising in May amid rumors of an imminent sale, and news of Great Plains’ offer spiked the stock’s price to $56.33 on May 31.
The price has fluctuated in the past year, dropping as low as $51.01 in February following testimony before the KCC.
Great Plains is the parent company of Kansas City Power and Light.