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The Deal: Fortis Sparks $4.3B Offer for UNS Energy

Stocks in this article: UNS

NEW YORK (The Deal) -- Tucson, Ariz., utility UNS Energy Corp. (UNS)said after the markets closed Wednesday, Dec. 11, that it agreed to be acquired by Fortis Inc. for $4.3 billion, including debt, allowing the Canadian buyer expand further into the U.S.

The price includes $2.5 million in cash and $1.8 billion in debt. The $60.25 per share cash price works out to a 31% premium over UNS' closing price Wednesday of $45.84.

Tudor Pickering Holt & Co. Securities Inc. said the deal came in at an 18 price-to-earnings ratio for 2015, 25% higher than the regulated utility average of 14.4 times. Bond research firm CreditSights said the price worked out to 8.2 times EBITDA, higher than where UNS was trading at 7 times but just above where its peers trade at 8 times.

Fortis has arranged acquisition financing, which CreditSights expects will term out with a mixture of debt and equity and possibly allow it to keep its A-/AL debt ratings - although it notes management has said in the past it's comfortable with a one-notch downgrade.

In October Moody's Investors Services noted that UNS could be a takeover target as part of what's expected to be steady M&A activity in the sector given lower load growth, the desire to cut risk and costs and capital markets support. Among those the ratings service named as possible acquires were Pinnacle West Capital Corp., Vectren Corp., Cleco Corp., Empire District Electric Co. and Scana Corp. It also tagged Fortis as a possible buyer, along with Berkshire Hathaway Inc.'s MidAmerican Energy Holdings Co., Duke Energy Corp., Exelon Corp., Iberdrola SA, National Grid plc, Gaz Metro Inc. and Epcor Utilities Inc.

The southwestern U.S. in particular has become ripe for consolidation given the fragmentation of utilities in the area and its economic growth, analysts say. Witness Teco Energy Inc.'s $950 million acquisition of New Mexico Gas Co. and MidAmerican's $5.6 billion purchase of NV Energy Inc., both of which were announced in May.

Fortis said in a separate release that the deal diversifies it into a fast growing part of the U.S., where by 2018 jobs are expected to expand by 2.9%, retail sales by 5.1% and personal income by 6%, citing statistics from the University of Arizona Economic and Business Research Center.

"The acquisition of UNS Energy is consistent with our strategy of investing in high-quality regulated Canadian and U.S. utility assets," Fortis CEO and president Stan Marshall said in a statement, noting that the deal should be accretive to earnings per common share in the first year after closing excluding one-time acquisition-related costs. "The acquisition further mitigates business risk for Fortis by enhancing the geographic diversification of our businesses, resulting in no more than one-third of total assets being located in any one regulatory jurisdiction."

Fortis, based in St. John's, Newfoundland, serves 2.4 million customers through electric utilities in five Canadian provinces and two Caribbean countries, a natural gas company in British Columbia, Canada, and New York gas and electric utility Central Hudson Gas and Electric Corp., which it acquired in June 2013 for $1.5 billion.

Fortis said after the deal closes its assets will increase by 33.5% to $23.5 billion, 92% of which are regulated. Regulated assets in Canada will make up 55% of its assets and the U.S. 34%, and its consolidated rate base is expected to increase by $3 billion. It will have 3 million electricity and gas customers.

Fortis expects its pre-acquisition utility capital spending program through 2018 to reach $7.5 billion, which it hopes will allow utility rate base and hydroelectric generation investment to grow at a compound annual growth rate of 7%.

UNS said the deal would provide additional capital and new resources for its units, including Tucson Electric Power and UniSource Energy Services.

"Joining the Fortis family will provide UNS Energy with new financial strength, helping us maintain safe, reliable and affordable service for our utility customers as we address the capital-intensive challenges facing our industry," UNS chairman and CEO Paul Bonavia said in a statement.

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