Pinnacle West: A Utility with Takeover Appeal
02/28/2018 5:00 am EST
Although we only buy stocks that we’d be happy to hold even if they remain standalones, we can’t ignore a company’s takeover potential and the possibility of booking a big capital gain if it gets acquired, notes Ari Charney, editor of Investing Daily's Utility Forecaster.
In fact, the utility sector’s correction could kick off the next round of mergers and acquisitions. The sector’s long-term consolidation is hardly over, especially considering that acquirers will be rushing to get deals done before rates head higher.
Arizona-based Pinnacle West Capital Corp. (PNW) has long been on both our wish list and our list of potential takeover targets.
With an enterprise value to EBITDA (earnings before interest, taxation, depreciation, and amortization) ratio of just 9.3, Pinnacle West is one of the more affordable utilities for potential acquirers.
Enterprise value shows the full cost of buying a company, including both equity and debt. Acquirers like to compare that cost to the cash flows, or EBITDA, a company typically generates.
Adding to Pinnacle West’s appeal for a prospective suitor is the fact that its primary operating subsidiary, Arizona Public Service Co., is a single-state utility.
In recent years, utility mergers have been increasingly contentious, with prickly regulators demanding ever greater concessions or spurning deals altogether.
onsequently, acquirers are looking for smaller utilities where a deal would only require securing approval from one set of state-level regulators.
Of course, Arizona’s regulatory environment can be somewhat unpredictable, though the fact that Pinnacle West recently secured an above-average return on equity suggests relations are more constructive these days.
A rising population and a growing economy in its main service territory offer Pinnacle West a favorable backdrop for its long-term growth story. With relatively low leverage compared to its peers, Pinnacle West boasts one of the strongest balance sheets in the industry.