UniSource Deal Flips a Switch in Energy Sector

Normally, it takes more than one big merger -- or even two -- to ignite talks of an industry trend.

But the utility sector has grown so cold that even one odd deal can spark heated discussions. Take the buyout recently announced by UniSource (UNS Quote). Until last month, UniSource was just another small-cap utility that had trouble pleasing even its own stockholders. Now it is being snatched up, at a rich premium, by outside investors who are accustomed to high-return thrills.

Kohlberg Kravis Roberts, a high-profile private equity group with backing from J.P. Morgan (JPM Quote) and Wachovia (WB Quote), plans to spend $853 million in cash, plus some $2 billion more in debt assumption, on the Arizona utility. If the deal goes through, it will mark one of the first times in recent history that a public utility has been taken private.

So industry experts see plenty to talk about.

"The announcement ... is a significant energy industry event for numerous reasons," said Mark Williams, an energy consultant and visiting scholar at the Boston University School of Management. "The [leveraged buyout] is at least acknowledgement that radical changes needed to occur."

Like many energy experts, Williams views the pending sales of UniSource and Portland General Electric (PGB Quote) -- both to private buyers -- as "two early signs that this battered sector is finally on the rebound." He is examining the UniSource deal, in particular, for industrywide meaning.

Shares of UniSource, trading for less than $20 when KKR made its offer, added a penny Wednesday to $24.65.

Ugly Duckling

Less than a month ago, UniSource was still disappointing investors.

The company posted third-quarter profits of 79 cents a share that, while better than a year ago, fell 17% shy of market expectations. Even Tucson Electric -- the company's core division -- missed earnings targets because of an unscheduled power plant outage. Meanwhile, the company's unregulated Millennium unit continued to bleed.