This Industry Expert Says Utility Mergers Will Keep Coming

Wisconsin Energy is buying Integrys Energy Group for $9.1 billion. The deal is big, but it's really just par for the course in an industry that's seen over 100 mergers and acquisitions over the past 20 years. This deal shows why famed value investor Mario Gabelli thinks there's plenty of deal making left to be done.

What's the deal?
Wisconsin Energy is paying a premium of roughly 17% to buy Integrys Energy Group. That's a nice pop for Integrys shareholders. A couple of days after the deal was announced, shares of Integrys were trading around $69 a share, a couple of bucks below the nearly $71.50 deal price. Investors looking to lock in a quick gain should probably sell their shares.

(Source: ReubenGBrewer, via Wikimedia Commons)

Once consummated, the combined company will be named WEC Energy Group. Of course, the merger has to pass through the typical hurdles before the deal can get done, including approval of key utility regulators. It's usually not a quick process and sometimes deals do get nixed. That's why there is a difference between the deal value and Integrys' share price.

Wisconsin gets bigger
The big benefit of this deal is that Wisconsin Energy will gain scale in the regulated utility market. It will go from roughly 2.2 million natural gas and electric customers to 4.3 million. Moreover, its operating region will expand from its namesake Wisconsin and Michigan to include Illinois and Minnesota. That will provide for material economies of scale.

That dovetails with Mario Gabelli's industrywide expectations. "For several decades, utility companies have acquired other utilities and utility assets for the sake of gaining economies of scale and efficiency. The same forces that resulted in more than one hundred utility takeover announcements over the past two decades remain in place, and new forces have come into play that continue to drive this long-term trend."

The new trends he's talking about include climate change and the associated regulations now being implemented, as well as a slowing in the rate of electricity demand. However, according to Gabelli, "The electric and gas utility sector remains fragmented, with over 60 electric utilities and 30 gas utilities. This is 50 more than we need, from the standpoint of economic efficiency."

There will be more
Basically, Gabelli is saying that there will be more mergers to come. The acquisition of Integrys Energy Group by Wisconsin Energy is a great example of why. Although Wisconsin Energy has increased its dividend in each of the past 10 years (including the 2007 to 2009 recession), its revenues have been stuck between $4.2 billion and around $4.5 billion since 2007. Wisconsin is a nice state, but there's only just so much growth potential from being in what is effectively one market.

(Source: ReubenGBrewer, via Wikimedia Commons)

That's why adding two new markets makes complete sense. The combined generating assets will give the enlarged entity more choices when juxtaposing environmental regulations against its power needs. It will also increase Wisconsin Energy's natural gas business from around 15% of the top line to nearly 25%. Historically low natural gas prices have shifted this segment of the utility market into growth mode again.

Once the deal is done, the merged Wisconsin Energy and Integrys Energy Group will own a combined 60% stake in American Transmission. Transmission assets are an increasingly valuable side of the utility market. Part of that is because of regulatory changes that are leading to shifts in the sources of power utilities are employing. Getting power from where it's generated to where it is used is increasingly important. In fact, investments in the so-called grid tend to be viewed favorably by regulators.

A year to go
Wisconsin Energy expects its acquisition of Integrys Energy Group to close in the summer of 2015. That's a long way off. Integrys shareholders should at least consider locking in gains. However, for those with a long-term bent, Wisconsin Energy looks like it will be a better company after the deal is done. You can expect a dividend hike along the way as well. For those looking for the next big merger, though, this deal shows exactly why you need to keep a close eye on the utility market.