Emera follows East Coast utility trend during acquisition process

How do you create a happy couple of shareholders?

Well if you are an East Coast utility the trick is pretty simple: Purchase a U.S. utility, make sure the multi-billion dollar acquisition is accretive, finance it in a creative manner, wait for a many regulatory approvals to be received and sit back and watch the stock rise.
 
That course of action has competed on three occasions recently most abundant in recent example occurring now when Emera Inc. announced the U.S. Committee on Foreign Investment had completed its review of the acquisition of TECO Energy and “determined there are no unresolved national security concerns with respect to the Acquisition.”

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While final approval awaits – the New Mexico Public Regulation Commission has yet to weigh in – the US$10.4 billion deal, that was announced last September, has already passed some regulatory hurdles including two from federal regulatory bodies this season.
 
Emera, like Newfoundland-based Fortis Inc. before it, financed the equity portion of the deal with an offering of convertible debentures by means of installment receipts: investors paid one third up front with the balance when the deal finally closes. For that they received a four per cent coupon C or 12 percent on their first installment.



The key was the conversion price. It had been set at $41.85 – a healthy discount to Emera’s then trading price ($44.05). At this conversion price, holders of the installment receipts will get 23.8949 Emera shares at closing. The receipts have traded well, hitting an all time high a week ago.

Emera was following the script set by Fortis: At the begining of 2012 it decided to purchase CH Energy for US$1.5 billion (and opted to raise the equity capital 4 months later); and in late 2013 agreed to outlay US$4.3 billion to acquire Arizona-based UNS Energy.

On that latter acquisition it raised the equity portion by means of an offering of convertible debentures in four per cent installment receipts. The conversion price was set at $30.72 (meaning 32.5521 shares per $1000 debenture), which represented a small discount towards the then trading cost of $31.19.

Both from the deals made by Fortis did close: the first deal took 14 months to reach the try line; the second a lot more than 10 months.

But Fortis’ shareholders were more than rewarded for his or her patience.

When the first transaction was announced the shares traded at $32.38; since then the shares, on a total return basis have gained 44.55 percent or even more than twice the comparable gain for the S&P/TSX composite index. When the second deal was announced the shares were trading at $31.19: since that time they gained on the total return basis 40.62 percent C or even more than four times the gain for the index within the same period.

Of course it is not always a slam-dunk. Consider the process that a group of investors (including the British Columbia Investment Management Corp.) experienced to acquire Cleco Corp. The US$4.7 billion deal was announced in October 2014. Last October the investor group filed more information designed to satisfy concerns of staff. (At that stage the offer had received federal regulatory approval and all which was required was the green light in the Louisiana Public Service Commission). Five months later the buyers remained as filing more improvements. The offer was approved now.
bcritchley@nationalpost.com