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Laclede's $1.6B Alagasco Deal Could Drive Dividend Growth

Updated from 12:42 p.m EDT to include CEO interview, updated share prices.

NEW YORK (TheStreet) -- St. Louis-based utility Laclede Group (LG - Get Report) is buying Alabama Gas, otherwise known as Alagasco, from Energen (EGN - Get Report) for $1.34 billion in a deal the company said would boost its earnings per share figures. Alagasco also represents the second major acquisition for Laclede CEO Suzanne Sitherwood's since taking the company's reins in 2012.

Sitherwood said in an interview with TheStreet that Monday's transaction fits within her vision of growing the regulated gas utility and marketing firm through a combination of acquisitions, organic growth and investment in new technologies in natural gas transportation. 

When including tax benefits of Monday's transaction, Laclede will acquire Alagasco for a total consideration of $1.6 billion. The company will also assume $250 million of Alagasco debt. Alagasco is the largest natural gas utility in Alabama and serves more than 422,000 customers.

Sitherwood believes that when Laclede's acquisition closes, it could open the company to a lager base of investors. "Given our new scale there will be other investors that are interested in us and move into our stock because of our sheer scale," Sitherwood said in a telephone interview. 

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When combined, Laclede said in an investor presentation it forecast pro-forma earnings before interest and taxes (EBIT) to be $255 million, with Algasco contributing $97 million to EBIT. Laclede's utility customer base is expected to increase from about 1.13 million to 1.55 million after the acquisition close.

Alagasco will add "meaningfully" to Laclede's net economic earnings per share and will drive the cash flow to reinvest in its utility business and boost capital returns to investors, Laclede said on Monday. Overall, Laclede forecast 4%-to-6% earnings growth in coming years, inclusive of its Alagasco transaction.

Wells Fargo analysts expect Monday's deal will be neutral to Laclede's earnings per share in 2015, but will begin adding to EPS in 2016 and beyond.

Growing Beyond Missouri

The acquisition will also push Laclede outside Missouri after the company acquired Missouri Gas Energy for $975 million in December 2012, in a deal that doubled the company's scale. 

"[We] view the geographic and, more so, regulatory diversity favorably as we consider Alabama to be an above average regulatory jurisdiction," Wells Fargo analysts said in a Monday client note. Those analysts estimated 35% of Laclede's earnings will come from Alabama when the transaction is completed.

"Alagasco is an excellent fit for Laclede, and allows us to leverage our combined scale, industry expertise and more than 150 years of experience to drive customer and shareholder value," Sitherwood added in a press release.

Stock, Debt & Convertible Financing

Laclede will finance the Alagasco acquisition with a $1.35 billion bridge facility provided by Credit Suisse and Wells Fargo. The company expects the remaining permanent financing to include the issuance of Laclede Group common stock, convertible notes, the issuance of long-term debt, and cash on hand.

On a conference call with analysts, Laclede said equity financing supporting the transaction would be in the range of $425 million to $475 million, while long-term debt would be between $650 million to $725 million. Convertible notes will account for between $100 million-and-$175 million in financing.

Dividend Increase

Laclede said it expects to maintain investment grade credit ratings after the deal is completed. The company also stressed it believes Monday's deal can help support capital returns to investors.

"The purchase of Alagasco supports additional dividend growth at a sustainable payout ratio," Laclede said in a statement on Monday. Sitherwood wouldn't elaborate beyond that statement when asked the timing or size of a prospective dividend increase.

Laclede currently pays a 44 cent quarterly dividend, or an about 4% annualized dividend yield.

Shares in Laclede  were falling over 2% in late Monday trading to $45.18, slightly underperforming the Dow Jones Industrial Average, which shed over 130 index points.

-- Written by Antoine Gara in New York

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