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Utility Fortis Inc. (FTS-T) said it will buy New York's CH Energy Group Inc. (CHG-N) for about $1 billion US to enter the U.S. state-regulated electric and gas distribution business that assures stable return amid weak power demand.
The fragmented U.S. utility industry has seen a number of deals in recent years -- such as Exelon's (EXC-N) $7.9-billion offer for Constellation Energy (CEG-N) and Duke Energy's (DUK-N) $13.7-billion bid for Progress Energy (PGN-N) -- as companies look to save cost and prepare for stricter environmental regulations.
Fortis, which lost out to Gaz Metro for Central Vermont Public Service (CV-N) last year, had said it could spend up to $6 billion to buy assets in the United States as opportunities in Canada were few.
"It's something that Canadian utility companies have been talking about ... Canadians trying to find ways to enter the U.S. market," said Ed Giacomelli, managing director of investment banking firm Crosbie & Co.
Fortis, which will also assume $500 million debt, will pay CH Energy shareholders $65 a share, representing a premium of 11 percent over Friday's close.
"We originally thought a deal would be larger at about $3 billion to $5 billion range, but I think this gives them a good opportunity to get a feel for the U.S. regulated market," Morningstar analyst Andrew Bischof said.
"I would not be surprised to see them do another small acquisition like this or may be even a larger one."
Poughkeepsie, New York-based CH Energy's Central Hudson Gas & Electric is a regulated transmission and distribution utility serving about 300,000 electric and 75,000 natural gas customers in eight counties of New York State's Mid-Hudson River Valley.
"CH Energy is a small utility and it's not that surprising they are being acquired, considering the on-going consolidation in the industry," Glenrock Associates analyst Paul Patterson said.
Fortis, the largest investor-owned distribution utility in Canada, serves more than 2 million gas and electricity customers. It owns and operates non-regulated generation assets across Canada and in Belize and upstate New York.
Fortis said the deal will immediately add to its earnings, excluding one-time transaction costs, and expects total assets to increase by about 16 percent to $17 billion post the deal.
As of December 31, CH Energy's total assets were $1.7 billion and operating revenue was $986 million.
"The purchase price has an implied PE of 25, which seems a little rich at first glance," Bischof said.
The deal, which is expected to close within the next 12 months, is unlikely to face any regulatory issues, according to Bischof of Morningstar and Paul Lechem of CIBC World Markets.
CH Energy will pay a termination fee of $19.7 million.
Fortis is being advised by Bank of America Merrill Lynch and Lazard is advising CH Energy.