Utilicorp Deal Raises Some Eyebrows

The deal's rich premium has some wondering about Utilicorp's motives.
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One Midwestern utility continues its empire building. Kansas City-based Utilicorp United (UCU) last week set its second acquisition of the year, agreeing to buy Empire District Electric (EDE) in a stock swap valued around $500 million. The merger calls for Empire shareholders to receive $29.50 in Utilicorp stock for each Empire share. The deal represented a 39% premium over Empire's premerger share price.

While relatively small, the acquisition represents Utilicorp's commitment to growing its Midwestern power base. But some analysts wonder if this latest growth comes at too high a price.

Lighting Up the Show-Me State

It was after losing a contentious battle for

Kansas City Power & Light

(KLT)

to rival

Western Resources

(WR)

in 1997 that Utilicorp focused on its nonregulated power marketing business and international operations. The company has more than 3 million electric and gas customers worldwide, with operations in Australia, New Zealand, Canada and the U.K. Utilicorp's

Aquila Energy

subsidiary finished 1998 as the nation's second-largest marketer of natural gas and the third-largest marketer of electricity.

But Utilicorp returned to its Missouri roots this year, first by acquiring

St. Joseph Light & Power

, which boasted customers across northwest Missouri, and now Empire District, which serves southwest Missouri as well as handfuls of customers in Kansas, Oklahoma and Arkansas.

"The merger suggests Utilicorp will remain a major player in Midwestern power markets," says David Wagman of

Resource Data International

, a Boulder, Colo., energy consulting firm. While small by industry standards, Empire is famed for its service to that burgeoning country music mecca, Branson, Mo. "It positions Utilicorp with

Ameren

(AEE) - Get Report

and Western Resources as the dominant players in Missouri and Kansas," says Wagman.

The merger also holds the potential to pit Utilicorp against a combined

Central & South West

(CSR)

and

AEP

(AEP) - Get Report

, which are in the process of merging. This could mean a competitive showdown should Oklahoma markets become deregulated. Ironically, Utilicorp's presence in the market may mitigate regulatory concerns over AEP's dominance in the Midwest resulting from the merger with Central & South West. Likewise, AEP's presence should mitigate Missouri regulators' concerns over Utilicorp's dominant market share in southwest Missouri.

Small Deals, Big Prices

While Utilicorp's recent deals will create a formidable Missouri utility, some analysts question both the strategy and the pricing. "I guess I can see it sort of making sense," one buy-side analyst says of the Empire deal. But, he adds, "these tiny little deals don't mean a lot. What do they really get you?"

From Utilicorp's perspective, it's the small deals that will grow the core utility business. "We're not looking to do likesize utility deals," says Utilicorp spokesman George Minter. "If you look around the country, these deals don't seem to be working out very well. Our strategy is to look to smaller midcontinent utilities to grow our base. There are plenty in the region and we'll continue to be aggressive."

Still, for some analysts the latest merger came with a rich price tag. "For a very small deal, this was a very stiff premium," says the buy-sider. One utility executive who evaluated Empire as a potential acquisition says fair value is in the low 20s per share.

A Grudge Match?

This leads some to speculation that the deals represent a continuation of the struggle between Utilicorp and Western Resources following their skirmish over KCP&L. Says our Midwestern utility executive: "There's no secret that

Utilicorp Chairman Rick Green and

Western Chairman David Wittig are not best friends."

Minter says that's not the case. "This is solely a business decision. We think both deals are priced fairly for us," he says, suggesting recouping a portion of the merger premium is possible. "We'll be visiting with the

Missouri Public Service Commission about recovering some of the costs."

Still, rapid deal making may come at a price to Utilicorp shareholders. "In the short term, these deals cloud the stock," says the buy-sider. "Investors see two quick deals and wonder what's next."

The deal also represents a departure from most recent takeovers, which brought only modest premiums to shareholders. The large premium offered in the Utilicorp-Empire deal threatens to change that. "The price seemed to be unreasonably high," says the buy-sider. "If that's a precedent, utilities will have to open their wallets." Or stop buying.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held any position in the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.