Scotia Comments Scotiabank Equity Research
Rating : Sector Perform
12 months Price Target $35
Is AltaGas Looking at WGL?
OUR TAKE
The media is reporting that AltaGas is in talks to combine with WGL
Holdings Inc. (WGL-N). Subsequently, AltaGas confirmed it was in talks with a third
party. Our initial take is that such a transaction would be nicely accretive for AltaGas
given its valuation premium to U.S. utilities. That said, the higher proportion of utility
assets would likely cause its valuation premium to compress. We are surprised by the
headlines as, in the past, management had expressed its view that utility acquisitions
looked pricey and the potential for U.S. tax policy changes to alter the landscape.
KEY POINTS
More of a merger of equals?
WGL has a recent market cap of ~US$4.3b with net
debt of US$1.5b leading to an EV of US$5.8b. Translating into C$ represents an EV of
C$7.6b, modestly below AltaGas's C$10.4b. We don't see much spare balance sheet
capacity for AltaGas and expect that the equity of such an acquisition would have to be
funded with shares. Given relative size, it would likely be a share exchange, in our view.
Is WGL the AltaGas of the U.S. Northeast?
WGL is a publicly traded holding companythat owns: (1) utility assets largely in Washington DC, Virginia, and Maryland; (2) WGLMidstream, which mainly invests in pipeline projects; and (3) Retail energy marketingand distributed generation systems. WGL sees 7-10% EPS growth longer term, which isdriven by a 2017-2021 capital expenditure plan of US$3.4b that is largely dependent onutility spend of US$2.2b. We see risk in the US$700m midstream spend given that someof the northeast U.S. pipelines it is involved in are facing challenges and delays (i.e.its
10% interest in Constitution). While there is not a geographic overlap with AltaGas, we
note they share similar business lines (utility, midstream, and power).
Other bidders possible? Yes.
In late November, it was reported that WGL had
received takeover interest from Iberdrola, which caused the shares to run up. The same
article noted that WGL was weighing its options including a sale following that indication
of interest. As such, we believe other parties are likely involved in the process.
Accretive, but would likely weigh on multiple.
We see an acquisition of WGL as
being accretive for AltaGas, potentially 6% in 2018 on a FCF basis. This is largely driven
by the valuation gap between AltaGas and WGL. Assuming an US$85 takeout price
for WGL, an acquisition represents a 2018E PE of 23.4x and an EV / EBITDA of 10.8x.
This is well below AltaGas's recent 2018 valuations of 29.0x PE and 13.8x EV/EBITDA.
While accretive, we expect that any such acquisition would likely pressure AltaGas's
multiple. Even still, the acquisition would likely be $1-2 additive to our valuation.