UniSource Deal Flips a Switch in Energy Sector

Instead, Williams expects KKR to quickly unload the entire company. He said a sweeping energy bill -- still alive at the time KKR and UniSource were negotiating -- would have repealed an old law that restricts mergers in the industry. While the bill itself is now stalled, due primarily to unrelated concessions, any new bill is expected to keep the repeal proposal in place.

"The repeal of this act would have potentially opened the door for a wave of mergers and industry consolidation as the purchase of multiple utility assets across state lines would have been more easily obtainable," he said. "It would [have] instantly created a whole new group of potential buyers for UniSource, KKR's newest acquired asset."

Williams believes KKR purchased UniSource in anticipation of the repeal. He also expects the repeal to materialize -- perhaps early next year -- and pave the way for KKR to sell off UniSource, at a tidy profit, to some other utility seeking improvements through economies of scale.

Alternatively, he said, KKR may choose to sell the utility at a much higher multiple through an initial public offering. He pointed out that KKR snatched up UniSource for just 7.5 times future earnings before interest, taxes, depreciation and amortization as compared to, say, the 10.5 times current EBITDA that AEP (AEP Quote) -- a much larger utility -- fetches. By quickly paying down debt and strengthening the company, he said, KKR could seek a much higher price for UniSource just a couple of years down the road.

To support his claims, Williams pointed out that Lehman Brothers took Peabody Coal private then public, at a significant profit, in less than two years. He did acknowledge that the Peabody IPO took place when buyers were still "enamored with the growth prospects for the deregulated energy sector." But he's convinced that repeal of the Public Utility Holding Company Act -- which has kept private investors like Warren Buffett from expanding their utility assets -- will make the sector suddenly attractive.

Indeed, he foresees a merger frenzy like the one that followed the repeal of restrictive laws in the banking industry over the past two decades. And he believes that KKR is simply the first in a long line of investors who plan to cash in.

"They're banking on being able to flip it," he said of UniSource. "The big bet is the Public Utility Holding Company Act. If it's repealed, that opens up the floodgate for potential buyers. ... I do see this as a clear trend."