Buyout Rejection Leads to Drop in Shares for UniSource Energy Corp.
Dec 23 - The Arizona Daily Star
Shares of UniSource Energy Corp. dropped more than 3 percent Wednesday, a day after state regulators rejected a $3 billion buyout of the company by a private investment group.
A company official and an analyst said UniSource is showing strength despite
the Arizona Corporation Commission's rejection Tuesday of the buyout offer.
In denying an effort by a Wall Street investment group led by takeover
specialist Kohlberg Kravis Roberts & Co., the commission agreed with the
findings of an administrative judge that the highly leveraged deal posed added
debt risk to ratepayers with no tangible benefit in return.
UniSource could ask for reconsideration of the decision but said it is
unlikely regulatory approvals would come in time to meet a March 31 deadline for
the deal to close.
UniSource is still considering its options, spokesman Steve Lynn said. In the
meantime, Lynn said, the case has had the effect of giving UniSource more market
exposure.
"The last year has drawn attention to the company in a way that
certainly hasn't been there before," he said.
"The fact that a big investment group was interested, I think, is a
statement of confidence in what we were doing and how we were doing it."
The relative buoyancy of UniSource's share price after the buyout bid's failure
didn't surprise the only analyst that formally follows the stock.
Maurice E. May, an analyst and principal at Power Insights of Westport,
Mass., said he felt the stock would drop to around $23.50 to $23.75 after
Tuesday's Corporation Commission decision. The stock didn't even fall that far,
and May said Wall Street has noticed UniSource.
While UniSource stock traded sparsely in a narrow range with the buyout
pending, May said, Wall Street began looking closer at the company's finances
after the judge's ruling dimmed the deal's prospects.
"When Judge (Jane) Rodda put out her negative recommendation, a lot of
analysts, myself included, started looking at the fundamentals of the company
again," May said.
May liked what he saw.
In a Nov. 19 report, the analyst upgraded UniSource shares from a
"sell" to a "buy," and set a target price of $27 per share
by 2006, based on projected annual 2006 earnings of $1.83 per share.
May, who owns UniSource stock, cited several factors, including:
--Operating-life extensions and lower depreciation at UniSource's
Springerville and San Juan power plants.
--The company's recent bargain purchase of part interest in a gas-fired power
plant in New Mexico.
--Lower losses at UniSource's unregulated Millennium Energy subsidiary, which
includes Tucson-based Global Solar Energy Inc.
--New operating fees at a third generating unit at Springerville, which
UniSource is building primarily for a regional utility consortium.
"All this, plus the ongoing growth of its Arizona service territories,
indicates a steeply rising earnings stream -- all internally financed," May
said in his report.
Some industry observers had said the KKR pitch for UniSource and another
pending private buyout, Texas Pacific Group's bid for Portland General Electric
Co., are part of a coming trend of utility buyouts by private investors who
could string them together to create regional companies.
The theory is based in part on moves in Congress to repeal the Public Utility
Holding Company Act, which would make it easier for utility companies to own
operations across state lines.
May said he thought such talk was overdone, noting that past predictions of
massive utility consolidation have not panned out. And one deal announced this
year involves the privately held TNP Enterprises, parent company of Texas-New
Mexico Power Co., selling to the publicly traded PNM Resources, parent of Public
Service Co. of New Mexico, May noted.
Another industry observer, Boston University finance professor Mark T.
Williams, said the UniSource deal's failure may chill the market.
Before the commission's decision, Williams, an opponent of private ownership
of public utilities, said: "If they stop this in its tracks, this is an
experiment, and this is the end."
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