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.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The Deal
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.

Industry Activity
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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  2. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  3. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  4. Economics

    Why It Is Important to Follow Crude Oil Inventories

    Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  4. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  5. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  6. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>

You May Also Like

Trading Center