US UTILITIES MAY TURN TO CONSOLIDATION, BUT HURDLES TO VALUE CREATION WILL BE HIGH
In the aftermath of the energy crises of the past three years, US utility companies have quietly stepped back from their forays in the unregulated world of competitive power and gas, and have turned back to the less exciting but much more stable world of the regulated utility company. But this "back-to-basics" strategy is limited, and will likely not produce the sort of earnings growth that investors are implicitly seeking. Pressures on back-to-basics utility managements would likely cause many utilities to reconsider consolidation as a growth engine. Although utility executives should remain open to opportunities, maintaining the discipline to avoid unjustifiable deals will be critically important.
- A course correction may be ahead, leading to lower valuations of utility stocks, or to new initiatives to produce earnings growth. It appears likely that mergers and acquisitions will be one of these growth initiatives.
- Based on CERA interviews, there is ample evidence that consolidation will not proceed without considerable hurdles that could erode the economic justification of acquisitions.
- Certain types of niche transactions, however, could be good opportunities.
