NSTAR: The Yin to Northeast Utilities’ Yang
In this “merger of equals,” as the deal experts call it, we hope there will be few bloody noses and fierce accusations. Heaven knows we’ve had plenty of that in the past few weeks, with the BHP (BHP)/Potash (POT) debacle and the drama between Genzyme (GENZ) and Sanofi-Aventis (SNY).
I admit that when I saw NSTAR in the headlines, I did a double take: is this the same NSTAR that sent men in junky cars to inspect our electric meter? As it turns out, it was.
As natives of the Northeast, my family became accustomed to the regular visit of the NSTAR man. At periodic intervals, the NSTAR man would arrive, unannounced, in his little white car with an NSTAR decal. Decked out in his NSTAR-logo collared shirt and hardhat, the NSTAR man gave our electric meter its regular check-up. Without fail, our electric bill went up.
I remember the first time the NSTAR man visited. My mother, as direct as they come, opened up the screen door and yelled, “Who are you and what are you doing on my property?!” The NSTAR men were hardly impressive, which explains my mother’s reaction.
One of the guys had no identifying NSTAR logo, and looked like he hadn’t bothered to shower for a week. The other guy was rummaging through a beat-up old jalopy. Looked like a robbery in the making.
My father went out onto the driveway to figure out what was going on. After the men told him they were with NSTAR, he made sure to keep a close eye on them in case they pulled any monkey business.
Regardless the occasion, our rates never failed to increase. So, upon seeing the “good news,” I’m a little bit skeptical about how this new conglomerate will affect rates.
In this vein I’ll continue to discuss this week’s deal of interest: the merger of Northeast Utilities and NSTAR. There hasn’t been a large amount of press excitement around this deal, probably because it’s in the utilities space and doesn’t involve hostile bids, White Knights, and poison pills.
The details are relatively boring: Northeast will pay $40.28 per share in stock, which represents the average share price of the past 20 trading days i.e. not a premium. The main outstanding items are shareholder approval early next year and federal and state regulatory review.
Nevertheless, Northeast Utilities’ announcement that it will acquire NSTAR will likely have implications for us Northeastern consumers, given that the newly combined company will possess over 3.5 million gas and electric customers across the Northeast.
Northeast Utilities is marketing this acquisition as a means of expanding its low-carbon footprint. In their press releases, the two companies have expressed their mutual devotion to each other: Northeast and NSTAR are two peas in a pod, the former the peanut butter to the latter’s jelly. Northeast has plans, BIG plans, which include building pipelines to transfer power from Northern New England and Canada to New Hampshire, Massachusetts, and Connecticut, all within the next five years.
Only problem is, Northeast needs about $9 billion to undertake this project. Northeast originally planned to raise the money by issuing new shares in the next couple of years, but this would dilute current shareholders. What’s a company to do?
Enter NSTAR, the mean, lean cash-generating machine, which has been using this cash to buy back its company’s expensive shares. This really does seem like a match made in Heaven! Northeast could use NSTAR’s cash to build!
We’re supposed to believe that Northeast Utilities is a growth story: the massive investments over the next decade will drive higher-than-normal returns than their bread-and-butter electricity business. Plus, the new transmission lines will make the newly-merged company more efficient because they won’t have to worry about power leakage along older lines.
Why do we care? This brings us back to my little anecdote: rates! The CEOs of both companies claim the newly merged behemoth will experience cost savings like never before, which will ultimately trickle down to the little guy. Given that the new company will possess about half of the market share in the Northeast, this seems a little hard to believe.
What about basic economics? Monopoly, oligopoly? What we can count on, however, is government insistence on rate controls as a prerequisite to merge. NSTAR’s current rate deal with the public utilities commission is set to expire in 2012, and the commission possesses the ability to change rates in the event of an M&A deal. It’s likely that the commission will require that the new company offer a “reasonable” price rate as a condition for the deal closing.
What does it all mean? Maybe we’ll still enjoy the unannounced visits of our NSTAR friends, now happy employees of Northeast Utilities. However, before buying into this “growth story,” we’ll wait to see what happens with rates. Maybe we could put all of our cost savings into Northeast Utilities stock! Or maybe not.
Disclosure: No positions in the stocks mentioned.