Utilities Thankful for Mergers

Enron is attempting to unload the utility for the third time in less than five years. It originally tried to shed the utility in a failed $2.1 billion transaction four years ago. Then it nearly sold the utility for even less -- offering it up to Northwest Natural Gas (NWN Quote) for $1.9 billion -- in a deal that fell through just before the company spiraled into bankruptcy in 2001.

Two years later, the utility market finally seems to be improving. Merrill Lynch analyst Steven Fleishman pointed to this month's two multibillion-dollar transactions as signs of a recovery.

"Between these two transactions and the potential for PUHCA repeal under the new energy bill," Fleishman wrote, "it could be a signal that merger and acquisition activity is picking up after a hiatus in the post-Enron era."

Shopping List

May, for one, sees the UniSource transaction as the more significant of the two.

Unlike Portland Electric -- which sold cheaply for a reason -- UniSource fetched a premium at a time when utilities have not been selling at all. And the utility, some believe, could have gone for even more.

"While the price may be fair, we do not view it as overly generous," May wrote. "We would expect that the investor group would strive to maximize earnings swiftly following deal closure, and would bring them to a level that would make its purchase price look relatively cheap."

If that happens, other small-cap utilities could bring even higher prices. May has already listed at least three regional players -- Cleco (CNL Quote), El Paso Electric (EE Quote) and PNM Resources (PNM Quote) -- that are rumored as takeover candidates.