Entergy (NYSE:ETR) announced the spinoff of the company's electric transmission business to shareholders, to be followed by the merger of this new company with a subsidiary of ITC Holdings (NYSE:ITC). The deal will create one of the largest independent electric transmission operators in the United States. (For related reading on utilities, see Trust In Utilities.)
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The mechanics of the deal is fairly complex, and starts with Entergy divesting its electric transmission business to a newly formed entity called Mid South TransCo LLC. This entity will then be distributed to Entergy shareholders in a tax-free spin off. The new company will immediately merge with a subsidiary created by ITC Holdings.
ITC Holdings will then implement a recapitalization that will result in former Entergy transmission shareholders owning 50.1% of the newly constituted ITC Holdings. The combined companies will have a rate base of $7.1 billion at the end of 2013.
The two companies expect a fairly long approval process for the deal, which is typical for mergers in the Utility industry. The proposed deal requires the approval of five local regulatory authorities, the Federal Energy Regulatory Commission, the Internal Revenue Service and U.S. Justice Department. At the company level, shareholders of ITC Holdings must approve the deal and authorize the issuance of additional shares by the company.
Entergy believes that the independent electric transmission business model is superior to a vertically integrated utility one and that exiting this business would benefit its shareholders. The company is also looking to avoid increased capital requirements required in the transmission business going forward.
Entergy estimates that projected capital expenditure in the electric utility industry will total more than $2 trillion over the next twenty years as the country upgrades aging infrastructure to meet reliability and regulatory requirements. The company is projecting that it will spend nearly $2 billion in capital from 2011 to 2014 on its transmission business. The deal is also consistent with the direction advocated by Congress and regulators, which have been advocating an independent transmission business model.
The utility industry has seen increased deal activity over the last year. In October 2010, Northeast Utilities (NYSE:NU) and NSTAR (NYSE:NST) announced a merger with a $17.5 billion enterprise value. In April 2011, Exelon (NYSE:EXC) and Constellation Energy (NYSE:CEG) agreed to merge in a deal with a $52 billion enterprise value. The companies have agreed to a $445 million investment in Maryland to ensure regulatory approval in that state. These benefits include building 175 megawatts of generation in the state and $112 million in rate credits to customers.
The Bottom Line
The utility industry is buzzing with deal activities and is no longer the sleepy sector that attracted many investors due to a less volatile earnings stream and rising dividends. This deal activity will probably continue in 2012. (For related reading, see Utility Funds: A Bright Choice In Bear And Bull Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.