Great Plains Energy Westar Energy

May 31, 2016 by  

Great Plains Energy Westar Energy, Great Plains Energy Inc. agreed to buy Westar Energy Inc. for $8.6 billion as power companies across the U.S. look to consolidate in the face of weak demand and rising operational costs.

Great Plains will pay $51 per share in cash and $9 per share in stock, and will assume $3.6 billion in Westar’s debt, the companies said Tuesday in a statement. Great Plains Chief Executive Officer Terry Bassham will become chairman and CEO of the combined company, while Westar CEO Mark Ruelle will remain in his current role until the deal closes, which is expected in the spring of 2017.

The transaction comes amid a boom in utility mergers and acquisitions as customers using more energy-efficient appliances and resources such as rooftop solar flatten electricity demand. There were more than $52 billion worth of utility deals pending or completed across the U.S. last year, the most since 2011, data compiled by Bloomberg show.

“The challenge obviously is that Westar is a bigger company than Great Plains so they are biting off a mouthful,” said Tim Winter, utility analyst with Gabelli & Co. in St. Louis. Financing will be a “manageable challenge,” but given the size of the deal “my assumption is they are going to have to issue more stock.”

Goldman Sachs Group Inc., which is advising Great Plains, will provide about $8 billion of debt financing for the deal, according to the statement. Guggenheim Securities is serving as Westar’s adviser. Pension fund Ontario Municipal Employees Retirement System will make a $750 million mandatory preferred convertible equity investment in the company once the deal closes, according to the statement.

Financial Investor
Kansas City-based Great Plains had been seeking to partner with a financial investor to help raise the cash necessary to buy its larger rival, a person familiar with the matter said earlier this month. Great Plains has a value of about $4.8 billion compared with Westar, the biggest utility in Kansas, worth about $7.5 billion. Great Plains has about 838,000 customers in Missouri and Kansas, according to the company’s website.

The addition of Westar’s generation fleet will give Great Plains customers more options to manage the impacts of future regulations on carbon dioxide emissions, according to the statement. The combined company will have one of the largest portfolios of wind generation in the U.S.

“The utility industry is facing rising customer expectations, increasing environmental standards and emerging cyber security threats,” Bassham said in the statement. “These factors, coupled with slower demand growth for electricity, are driving our costs and customer rates higher.”

Regulatory Approvals
Great Plains fell 7.6 percent to $28.66 at 9:40 a.m. in New York. Topeka, Kansas-based Westar was up 6.5 percent to $56.35.

Westar delivers power to about 700,000 customers in Kansas and owns power plants capable of producing about 7,000 megawatts, according to the company’s website. It operates in a single state so regulatory approvals may not be as complicated to obtain as they have been for utility deals involving several jurisdictions.

The companies expect to seek approval for the deal with the Kansas Corporation Commission and other regulatory entities during June and July. Great Plains Energy and Westar will seek shareholder approvals later this year. The transaction is subject to approvals from the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission.

Regulators “may express some concerns about concentration within the KCP&L – Westar service territories, but are unlikely to block the transaction on that basis alone,” Katie Bays, an analyst with investment firm Height LLC, said in a research note Tuesday.

Debt Financing
Great Plains expects the accord to be neutral to earnings-per-share in the first full calendar year of operations and “significantly accretive” after that, according to the statement.

Westar had also drawn interest from Ameren Corp. and an investor group that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board, people familiar with the matter said last month, asking not to be identified because the information wasn’t public.

“Due to a number of factors including conservation, more efficient appliances, and distributed generation electric usage growth is at a historical low,” said Jaimin Patel, senior credit analyst With Bloomberg Intelligence in Skillman, New Jersey. Growth is “more likely to come through these kinds of deals and acquisitions.”

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