Fortis (
TSX: FTS,
Forum) made headlines today when it offered to acquire ITC Holdings (
NYSE: ITC,
Forum), the largest independent pure-play electric transmission company in the United States, in a deal worth approximately US$11.3 billion. ITC currently owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma.
According to the
news release, ITC shareholders will receive approximately US$6.9 billion in Fortis common shares and Fortis will assume approximately US$4.4 billion of consolidated ITC indebtedness. ITC will become a subsidiary of Fortis as a result of the transaction with approximately 27% of the common shares of Fortis being held by ITC shareholders.
Fortis has offered to pay out US$22.57 in cash and 0.7520 Fortis shares for every ITC share held, resulting in a premium of 33% over ITC’s unaffected closing share price on November 27, 2015 and a 37% premium to the unaffected average closing price over the 30-day period prior to November 27, 2015.
The deal will rank will boost Fortis’ consolidated mid-year 2016 pro forma rate base by approximately US$6.0 billion to approximately US$18.0 billion, making it one of the top 15 North American public utilities according to enterprise value, which is estimated to reach US$30.0 billion post-transaction.
Fortis President and CEO, Barry Perry, commented on the transaction, “Fortis has grown its business through strategic acquisitions that have contributed to strong organic growth over the past decade. Our performance in 2015 is a clear demonstration of the success of this strategy.”
He continued, “The acquisition of ITC - a premier pure-play transmission utility - is a continuation of this growth strategy. ITC not only further strengthens and diversifies our business, but it also accelerates our growth.”
Both Boards have approved the transaction as being in the best interests of shareholders. Fortis will seek to gain shareholder approval of the issuance of 40% of the outstanding common shares of Fortis (on a pre-Acquisition, non-diluted basis) as partial consideration for the Acquisition at an upcoming shareholders’ meeting.
Fortis will fund the deal through the issuance of approximately US$2.0 billion of Fortis debt and the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors.
The proposed transaction is expected to close sometime in late 2016 and is subject to customary closing conditions, regulatory and federal approval as well as ITC and Fortis shareholder approval.
When the deal closes, ITC will continue to operate as a stand-alone transmission company and Fortis will continue to list on the TSX but will also apply to list its common shares on the NYSE.
MARKET REACTION:
Fortis shares dipped 11.72% on a small amount of trading to $36.53 per share. ITC Holdings shares edged own 2.29% to $38.48 per share.
OUR TAKE:
2015 blew the doors off M&A deal records with 69 deals of $10.0 billion, including 10 transactions valued over $50.0 billion. Blockbuster mergers such as AB InBev/SABMiller, Du Pont/Dow Chemical and Pfzier/Allergan helped to edge out 2007’s record levels adding to the $4.7 trillion in announced mergers and acquisitions last year.
Many feel we are in the midst of the seventh wave of rapid merger activity over the last 100 or so years. With the slowed economy, improving efficiencies and profitability have become key, and even though corporate America is sitting on a record $1.4 trillion in cash according to a FactSet analysis of S&P 500 companies, infrastructure investment and organic growth have taken a back seat to the relatively cheaper and more immediately accretive option of buying up the competition.
The question is how effective is M&A as the major growth factor for a company and what is the long-term impact on shareholders and the market itself. M&A waves, such as the one around the turn of the 20
th century, created monopolies such as US Steel and Standard Oil. Even though regulators seem to have more teeth these days when they killed the proposed Office Depot/Staples merger, corporations are still pushing the envelope and winnowing down the competitive field. What’s the difference between one company controlling a sector and three companies; it’s still a relative monopoly.
There is also the possible addition of risk as evidenced by the recently announced Tahoe Resources/Lake Shore Gold merger where LSG shareholders used to operations in mining friendly jurisdictions are now exposed to Tahoe’s politically hot holdings in Colombia. Now one might say that this is balanced out by fact Tahoe will give LSG the financial clout to push its projects forward and LSG gives Tahoe the ability to diversify, but will everything work out as planned?
There have been numerous studies that have pegged the failure rate of mergers and acquisitions between 70% and 90%, mostly due to executives failing to hit projected expectations because they didn’t find the right acquisition or distinguish the acquisition that will improve current operations from the acquisition that stands to transform the company’s growth prospects.
That said, Fortis seems to have done its homework on this one, as it plans to continue diversifying in order to capitalize on the green energy movement as well as take advantage of the long-term growth aspects due to such things as the Clean Power Plan, while utilizing the executive already in place at ITC to run operations. But if this deal proves out, it will be the exception to the norm, so why are companies so eager to jump on the M&A wagon?
Well, while debt financing remains cheap and sectors continue to consolidate, executives will be ever more inclined to keep up with the Joneses, seeking share price rewards and immediate market share growth rather than fixing what is broke and building from the ground up. After all, when investors demand increasing growth and dividends every quarter, what’s a CEO to do but think short term? I believe 2016 is going to be another big year for M&As, but I’m still not sold on whether it’s a panacea for current market troubles or the companies trying to survive this sluggish economy.
I have no interest, long or short, in any of the companies mentioned in this article.
--Gaalen Engen
https://twitter.com/gaalenengen