UniSource Deal Flips a Switch in Energy Sector

Following last month's report, Power Insights analyst Maurice May promptly suggested that UniSource sell at least part of the company to improve its overall value.

"We believe that if UniSource would liquidate the unregulated operations at Millennium ... the market would ... easily send the stock to $23 per share," May wrote on Oct. 30. "Perhaps if the market really liked Arizona growth prospects, it would capitalize the earnings even higher and propel the stock upwards of $25 per share."

Within two weeks, KKR offered to buy the entire company for $25.25 a share. Many experts believe the firm will now quickly dispose of Millennium's money-losing assets. In the meantime, KKR partner J.P. Morgan has already pointed to Arizona's growth -- which is double the national average -- as a good reason to buy.

"UniSource Energy satisfies the energy needs in one of the fastest growing regions in the U.S.," said Jeffrey Walker, managing partner of J.P. Morgan Partners. "We look forward to supporting their continued growth."

The KKR offer came shortly after a pair of positive developments at UniSource. The company closed on a transaction that should add nearly 20 cents to fourth-quarter earnings and used the cash to buy a distribution system viewed as a long-term investment that will immediately boost company profits.

"Hats off to management for this one!" May declared. "Progress is not coming as fast as investors would like, but we believe it is nevertheless coming -- with positive ramifications for the stock."

Then KKR stepped up with its generous offer. Still, it plans to keep the same UniSource leaders -- the ones who have frustrated investors for so long -- in place. KKR said it had found in current management "the right team with the right game plan" to lead UniSource to success. But it would have paid up to $18 million in severance if it had decided otherwise.

According to UniSource's bylaws, all senior executives would be entitled to three times their salary and bonus -- plus retirement and stock benefits -- if a new owner fired them within five years of a takeover. But Williams, for one, questions whether KKR will even hold on to the utility that long.