Merger Mania: Charged Utilities

03/05/2004 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

"Leveraged buyouts, bidding wars, hostile takeovers—there’s little doubt that utility merger mania is heating up again in early 2004," says Roger Conrad, leading utility expert and editor of Utility Forecaster.Here are three "tempting takeover targets" from his model portfolio.

"Compelling values are one reason for this merger mania. A year and a half after their worst crash since the Depression, power and communications companies are in the bargain rack. At the same time, risks are fading as thorny legal and regulatory disputes are ironed out while the reviving economy eases credit pressures and raises hopes that spare capacity will be soaked up.

"These takeover targets–which are also in our model portfolio–are worth owning even if no deal emerges. First, each boasts a strong and improving balance sheet, a solid franchise and proven management. Second, each has assets making it an extremely valuable catch for a host of suitors. And, all are small enough for a big player to offer all cash and sell at low multiples to book value, sales and earnings.

"Atmos Energy (ATO NYSE) serves 1.7 million customers in over 1,000 small- and medium-sized communities, the kind of places where America is moving today. Atmos couples strong customer growth with cooperative regulation and conservative energy management activities to generate steadily rising earnings, topping expectations for its fiscal first quarter of 2004 despite mild weather. A successful takeover offer would be at least the lower 30s—and it will get there on its own in the not-too-distant future anyway. Buy on periodic dips under 25.

"NiSource (NI NYSE) left itself heavily indebted after buying the Columbia Gas pipeline system in late 2000. Credit rating pressure forced it to sell unregulated assets and trim its dividend last year. But the company is now focused on regulated natural gas and power systems in nine states serving 3.7 million people, with 16,000 miles of pipeline linking the energy-hungry Northeast and Midwest. Still paying down debt and selling for the bargain price of 1.3 times book, NiSource could fetch at least an upper-20s takeover bid and is a buy up to 21.

"TDS (TDS ASE) is actually two companies. It owns 82% of US Cellular, which serves 4.4 million customers in rural and small town areas around the country. Unlike most wireless rivals, it’s consistently turned a profit and boasts very low customer turnover. Rural-based wireline unit TDS Telecom lost barely 1% of its lines over the past year, which it more than made up for with advanced services. During the last telecom boom, TDS commanded a premium multiple as it sold what later became T-Mobile USA. Today, a suitor could have the whole thing for about $5 billion and 1.5 times book value. TDS is a buy again up to 75."

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