ITC acquisition ‘accelerates’ growth of Fortis
Low-key Fortis Inc. created a big splash Tuesday with a friendly offer to buy U.S. electricity transmission company ITC Holdings Corp., driven by the prospect of capturing infrastructure growth opportunities in the United States.
If approved by U.S. regulators, the US$11.3 billion cash-and-stock deal would propel the combined entity to the status of the 13thlargest North American utility, with an enterprise value of US$42 billion, the two companies said in a statement.
Newfoundland-based Fortis is the country’s largest utility owner, with operations across its home province, Prince Edward Island, Ontario, Alberta and British Columbia.
Over the past decade, the St. John’s-based company has been steadily expanding its footprint to Belize, Cayman Islands and Turks and Caicos.
Fortis has also been building its asset base in the U.S. with the acquisition of New York-based CH Energy Group Inc. for US$1.5 billion in 2013 and Arizona-based utility company UNS Energy Corp. for US$2.5 billion in 2014.
“The acquisition of ITC — a premier pure-play transmission utility — is a continuation of this growth strategy,” said Barry Perry, president and chief executive officer of Fortis. “ITC not only further strengthens and diversifies our business, but it also accelerates our growth.”
Novi, Mich.-based ITC will add eight more U.S. states to the Fortis portfolio, with its assets of highvoltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, serving a combined peak load exceeding 26,000 megawatts spanning about 25,000 kilometres of transmission lines. The company is also a public utility and independent transmission owner in Wisconsin.
“We take a very disciplined approach to acquisitions and are focused on businesses that have experienced management teams, provide geographic diversity in favourable economic regions, and possess significant growth prospects,” Perry said.
The deal will be transformative for Fortis, with its U.S. business accounting for 62 per cent of revenues. But it will also require a US$2 billion bond issuance to fund the acquisition, which would effectively double the company debt. Fortis also plans to list on the New York Stock Exchange, in addition to its Toronto listing.
The companies hope to close the deal by the end of the year, after ap- provals from the Federal Energy Regulatory Commission (FERC) and state regulators.
ITC shareholders will receive US$22.57 in cash and 0.7520 Fortis shares per ITC share in the deal, a 33 per cent premium over ITC’s shares on Nov. 27, just before ITC said it was working with advisers for a potential sale of the company.
“There has been a lot of M&A in the utility sector and they have all had a fairly high premium and considering that ITC is a pure play transmission company, it is considered an attractive play,” said Jeffrey Cassella, senior analyst at Moody’s Investors Service.
Fortis stock reacted negatively on prospects of rising debt and share dilution for existing shareholders, falling 11 per cent to $36.81 in Toronto. ITC Holding was down two per cent to US$38.59 per share in New York.
“We clearly are financing the transaction with a substantial amount of U.S. dollar debt,” Karl Smith, chief financial officer at Fortis, told investors during a conference call. “So, you’re buying ... the U.S. dollar asset with U.S. dollar debt and that reduces the exposure.”
Cassella, who left ITC’s Baa2 rating unchanged after the deal announcement, believes the U.S. company is appealing for investors as it’s regulated by the less cumbersome FERC, which allows for higher returns on equity, compared to U.S. state regulators.
“When you stack the U.S. regulatory environment — especially FERC-regulated — versus the Canadian regulatory environment, I think they offer potentially higher returns on equity,” Cassella said in an interview from New York.
A Fortis presentation noted the company is driven by opportunities presented by changing regulations in the U.S.’s power sector, which require investment of as much as $160 billion this decade alone.
“Our systems in the United States have really got two prongs that are maybe three that really drive the growth long-term,” said Joseph Welch, president of ITC.
These include the “historic underinvestment” in aging power infrastructure assets, and the U.S. Clean Power Plan which will require substantial transmission investment in the form of renewables, interconnections and general infrastructure build-out.
Fortis, which started life as St. John’s Electric Co. in 1885, now serves 3.2 million customers across the Americas, with a market cap of $11.7 billion and revenues of $6.7 billion in the past 12 months ending September 2015.