UIL Holdings Corp.; market cap (as of 27/02/15): US$2.86bn
Iberdrola SA; market cap (as of 27/02/15): US$43.5bn
Introduction
On February 26, Iberdrola SA, Spain’s largest electricity company, agreed to buy UIL Holdings Corp. in a deal valued at about US$3bn in cash and shares. With the acquisition, Iberdrola plans on merging its American subsidiary with UIL in order to create a listed utility company with 3.1m costumers and 6.7GW of installed capacity. The acquisition will combine Iberdrola’s US energy companies with UIL Holdings to create a new, US$18bn electricity and natural gas business, making it one of the 20 largest utilities in the US by market capitalization.
About Iberdrola
Based in the northernmost part of Basque Country, Iberdrola is Spain’s leading energy group and one of the top-ranked companies in the IBEX 35. With a market capitalization of roughly €39bn, Iberdrola is one of the world’s largest utility companies. The Bilbao-based group comprises a range of international subsidiaries, obtained through an expansion strategy aimed at establishing a significant foothold in foreign markets. Iberdrola itself is a product of a 1992 merger of Hidroeléctrica Española and Iberduero, which paved the way for the far-reaching transformation that followed. With the acquisitions of Scottish Power in 2006, Energy East (now Iberdrola USA) in 2008 and Elektro three years later, Iberdrola became a major player in the UK and US energy sectors and obtained a significant presence in Brazil, which fortified its Latin American holdings.
About UIL
UIL is publicly traded on the NYSE and serves as a holding company for a range of smaller local providers of energy related services. The Connecticut-based company provides electric and gas utilities to more than 700,000 customers in 67 communities in its home state and the state of Massachusetts, with combined total assets of over US$5bn. The company had actually itself considered expanding, offering to pay US$1.86bn for Philadelphia Gas Works, America’s largest municipality-owned utility company. Nevertheless because of political tensions and concerns over the transaction’s impact on customers and unions, UIL walked away from the deal last December and instead opted to become Iberdrola’s target. In this way, UIL achieved its ambition of being “a larger, more diversified power and utility company” as pointed out by James P. Torgerson, UIL’s president and CEO who will head the combined company when the deal closes.
The Deal
The transaction, which overall amounts to US$4.6bn including debt, values each UIL share at US$52.83, comprising US$10.50 in cash and the rest in stock in the new company, which will be listed on the NYSE. At that value, the deal represents a 23,6% premium over UIL’s closing price. Despite the significant premium, the acquisition is expected to be accretive from day one and was met with positive sentiment on the market, with Iberdrola’s share price rising 1% at the close in Madrid. Upon completion of the transaction, it is expected that long-term EPS of the combined company will grow by approximately 10% annually through 2019. The deal, which has been unanimously approved by both companies’ boards, is expected to close by the end of the current year after regulatory approval. Once the transaction is closed, Iberdrola will own 81.5% of Iberdrola USA while UIL shareholders will end up owning the remaining 18.5% stake.
The Background
The acquisition comes exactly one week after Iberdrola’s announcement of a 9.5% fall of the annual net profit to US$2.61bn. In particular, those profits were hampered by a change in the Spanish regulatory landscape that caused the company to lose US$380m, throughout 2014, in state subsidies for its renewable energy operations in Spain. As a matter of fact, Iberdrola’s immense growth in the previous decade is the result of a strong emphasis on renewable energy, with a heavy use of environmental subsidies which on the one hand made the company a global leader in wind power, and on the other made its revenues over-reliant on government aid. In the past, Spanish governments funded subsidies to the energy sector in order to compensate for the gap between high production costs and too competitive electricity prices, which contributed to the pile up of public debt. As Spain turned to austerity in the midst of the sovereign debt crisis, those once-bountiful subsidies, that made Spain one of the world’s most attractive investment destinations for green energy, have been cut back as a part of a wider energy reform. In an effort to tackle the country’s so-called “tariff deficit”, the administration reduced aid to the energy sector by US$3bn last year, along with imposing new taxes on power generation. Although the negative effects of these reforms were partly mitigated by the performance of its operations in the UK, the US, Brazil and Mexico, as well as the weakening euro, Iberdrola’s profits have declined substantially.
The Rationale
In response to sliding performance, the company’s Chairman Ignacio Sanchez Galan vowed to cut Spanish investments and focus on expanding abroad. The UIL acquisition is seen as a part of Mr. Galan’s plan for inorganic growth as Iberdrola joins other European corporations seeking to diversify away from the Eurozone’s stagnant economy. Just last year Germany’s conglomerate Siemens agreed to buy US turbine maker Dresser-Rand, for US$7.6bn. As Mr. Galan pointed out, “the operation that integrates Iberdrola USA and UIL is consistent with our strategy of growth in this country, a key market in which we are taking a major step forward”. The deal will further expand the activities of the acquirer’s US subsidiary, formerly known as Energy East, which already has the 2nd largest portfolio of wind energy in the country with a presence in 23 states, serving approximately 3 million costumers. Moreover the deal is consistent with Iberdrola’s strategic plan to create a combination of geographically complementary businesses and enhance opportunities to jointly develop new projects and operations through a regulated investment program in renewables, a solid investment grade balance sheet and a healthy cash flow profile. The combined entity “expects to invest US$6.9bn in regulated electric and gas infrastructure and other capital expenditures over the next five years” as jointly reported by the two companies following the agreement.
Financial Advisors
Morgan Stanley advised UIL, while Lazard served as financial adviser of Iberdrola.
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