Within two weeks of the termination of its proposed merger with Hawaiian Electric Industries (HEI), NextEra announced a separate deal to purchase the regulated T&D wires company Oncor Electric Delivery Co. LLC (Oncor) from the bankrupt Energy Future Holdings (EFH). The two deals, each representing $4.3 billion and $18.7 billion in total transaction value respectively, provide a stark contrast in M&A transactions in a very brief period of time. Though the HEI transaction ultimately fell apart, the EFH transaction is on track to achieve the required regulatory approvals, clearing the way for the deal to close in the first half of 2017.

Key Details

Failed NextEra/HEI transaction

• On July 15, after approximately 18 months of deliberation, the Hawaii Public Utilities Commission voted 2-to-0 to dismiss NextEra’s proposed acquisition of HEI
• The commission concluded that the benefits of the proposed transaction were “neither certain enough nor great enough to offset the identified risks, uncertainties, and potential costs that could reasonably be expected from the Change of Control”
• NextEra responded by notifying HEI that it was formally terminating the pursuit of the merger the next day and that it would pay a $90 million termination fee and reimburse HEI for up to $5 million of expenses related to the transaction pursuant to the terms of the merger agreement

Proposed NextEra/EFH transaction

• On December 1, Texas regulators approved a draft preliminary order for NextEra’s proposed acquisition of Oncor but cautioned against a provision seeking to eliminate the special rights held by minority owner in the event that NextEra fails to acquire the minority stake
• Adding Oncor would give NextEra 8.6 million new customer accounts, 200,000 miles of power lines, and $102 billion in assets, while positioning the company to take a leadership role in the integration of renewable energy into the Texas power grid
• The Oncor sale is also a key to EFH’s plan to exit bankruptcy, where it has been mired in for approximately two and a half years
• Hearings have been set for February 2017 to confirm EFH’s Chapter 11 bankruptcy exit plan and the proposed sale of Oncor to NextEra

Timeline of Events

• 12/3/2014 – NextEra announces acquisition of Hawaiian Electric Utilities (HEI) for $4.3 billion* (Transaction Value/EBITDA: 7.1x)
• 8/10/2015 – Hunt announces acquisition of (80.03% of) Oncor for $18.9 billion* (Transaction Value/EBITDA: 12x)
• 5/1/2016 – Hunt acquisition of Oncor is terminated
• 7/16/2016 – NextEra acquisition of HEI is terminated
• 7/29/2016 – NextEra announces acquisition of (80.03% of) Oncor for $18.7 billion* (Transaction Value/EBITDA: 12.4x)

Implications

• After a long and sordid bankruptcy, which has seen EFH and Oncor courted by an extensive list of suitors, NextEra appears poised to finally succeed in closing the sale of Oncor, making NextEra the largest diversified energy company in the United States by market capitalization at $56.3 billion (surpassing Duke Energy Corporation at $53.2 billion)
• The Hunt Consolidated proposal generated headlines for its novel approach, which proposed converting Oncor into a Real Estate Investment Trust (REIT), but serious nagging concerns expressed by the Public Utility Commission of Texas (PUCT) about where the tax benefits of such a structure accrued (i.e., to the owners vs. to the rate payers) ultimately scuttled the deal
• A sound buyer and a more traditional proposed deal structure (i.e., not an infrastructure REIT) appear to have been more successful than the previous effort led by Hunt Consolidated
• NextEra’s signal that Oncor will become a principal business post-close suggests a strong valuation for the traditional regulated T&D wires company which is located in a high growth area of the United States
• Though the NextEra/Oncor deal is not a convergence deal like many of the recent large utility combinations announced in the United States, it is yet to be determined whether or not it is indicative of a trend or an outlier

Note: *Transaction values include the amount paid for equity, plus the value of any assumed long-term liabilities

More Information

SNL Energy: https://www.snl.com/web/client?auth=inherit#news/article?Id=38563840&KeyProductLinkType=2

Utility Dive: http://www.utilitydive.com/news/texas-regulators-approve-draft-order-for-nextera-oncor-deal/431626/

Bloomberg: https://www.bloomberg.com/news/articles/2016-07-29/nextera-agrees-to-buy-oncor-in-takeover-valued-at-18-4-billion

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