Utility Takeover Targets

03/10/2017 7:05 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Elevated valuations have prompted us to narrow our list of potential takeover targets to nine stocks, explains utility expert Roger Conrad, editor of the industry-leading Conrad's Utility Investor.

All the companies in our table have market caps that fall within the range of recent transactions. More important, we would have no problem owning these stocks if no deal materialized.

These potential takeover targets trade at reasonable valuations, increasing their appeal - although we caution that these are speculative ideas for aggressive investors.


Artesian Resources (ARTNA) increased its dividend twice last year, thanks to a combination of customer additions, system acquisitions and investment in its regulated water utility in Delaware and Maryland.

The stock trades toward the low end of industry valuations, making the company a tempting morsel for one of the industry's bigger players. It boasts a strong balance sheet and conservative payout policy.

Abengoa (Madrid: ABG), the bankrupt sponsor of Atlantica Yield (ABY) - an aggressive income holding - received court approval to sell its 41.47 percent equity interest in the yieldco.

The big question is whether a buyer will absorb Atlantica Yield outright or assume Abengoa's role as a sponsor that drops down assets to the yieldco.Alternatively, Abengoa could market these shares publicly, a messy process that would hit the stock price hard.

On the plus side, Atlantica Yield has extricated itself financially and operationally from its parent. With a portfolio of high-quality generation assets, Atlantica Yield could be an enticing takeover target.

Energen (EGN) became a pure-play oil and gas producer in the prolific Permian Basin after divesting noncore acreage; it aims to grow its hydrocarbon output by 20 percent annually over the next three years.

With its high-quality assets, Energen's shares could fetch $70 or more in a takeover offer. Energen Corp. rates a buy for aggressive investors who can stomach the volatility.

NiSource (NI) emerged as a pure-play gas and electric utility after spinning off its midstream assets as Columbia Pipeline Group in July 2015. Trading at 8.9 times trailing cash flow, NiSource is a relative bargain on a short list of potential takeover targets in the utility sector.

Absent a deal, the company's planned investments in its regulated systems should drive mid-single-digit dividend growth over the next five years.

NorthWestern Corp. (NWE) has the capacity to grow its dividend in the mid-single digits in coming years, while its footprint in Montana makes it a potential takeover target for Berkshire Hathaway (BRK.A), which has acquired several utilities in the area.

Despite some disagreements with Montana regulators over rates, the company boasts a strong balance sheet and solid growth prospects. NorthWestern rates a buy on pullbacks to less than $50 per share.

NRG Energy (NRG) reportedly has placed itself on the sales block, with CEO Mauricio Gutierrez musing publicly that "the days of the pure independent power producer are over."

Persistent weakness in wholesale power prices from cheap natural gas and growing adoption of renewable energy continue to pressure earnings. NRG Energy is a speculative buy.

Shenandoah Telecommunications (SHEN) is the rare regional telecom that trades at a reasonable valuation and pays a modest, steadily growing dividend.

Challenges integrating last year's acquisition of NTELOS Holdings Corp have weighed on the stock. In the meantime, its cable television and broadband internet services continue to add users.

Trading at 1.59 times book value and 8.9 times cash flow, Spire (SR) is the rare gas utility whose stock hasn't been bid to the moon - likely because of investors' trepidation about regulatory relations in Missouri.

However, the regulatory situation should improve in the wake of the recent gubernatorial election. These developments should put Spire back on potential acquirers' radar screens.

Telephone & Data Systems (TDS) has the best-in-class wireless and wireline network in its rural service territory; it generates stable cash flow, enabling the company to grow its dividend by 5 percent in 2016.

Its assets would complement any number of regional telecoms - and the stock trades at 5.7 times operating cash flow, leaving plenty of room for an acquirer to pay a high premium.

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