Avangrid's $4.3 bn merger with PNM Resources
By: Alexander Anderton, Yash Patankar, Chelsea Song, Igor Chmielinski
Overview of the deal
Avangrid, a leading sustainable energy company, and PNM Resources announced on 21st October 2020 that their respective boards have approved the merger of PNM Resources into Avangrid, for $4.3bn. The agreement is subject to approval by PNM Resources shareholders and the transaction will require approval from several state and federal regulators, which are expected to be completed in approximately 12 months.
The integration into Avangrid will create one of the largest companies in the US utility industry, with 10 regulated electricity companies in 6 states (New York, Connecticut, Maine, Massachusetts, New Mexico and Texas) and the third-largest renewable energy operator in the United States with a total presence in 24 states.
The combined company will have an Enterprise Value of approximately $8.3bn, assets in excess of $40bn, about $2.5bn in EBITDA and a net profit of $850mn. The purchase price represents a premium of 10% over the PNM`s share price as of 20th October and 19.3% over the average PNM share price during the 30 days prior to the 21st of October. The combination of Avangrid and PNM, with over 4.1 million points of supply, the regulated asset base of $14.4bn, more than 168,000 Km of networks and approximately 10.9 GW of installed capacity (as of 2019), will accelerate Iberdrola Group's (Avangrid’s parent organisation) growth in the US.
Company Details: Avangrid
Avangrid is a leading sustainable energy company with approximately $35bn in assets and operations in 24 US states. They have two primary lines of business: Avangrid Networks and Avangrid Renewables. Avangrid Networks owns eight electric and natural gas utilities, serving more than 3.3 million customers in New York and New England. Avangrid Renewables owns and operates a portfolio of renewable energy generation facilities across the United States.
Headquarters: Orange, Connecticut, USA
CEO: Dennis V. Arriola
No. of employees: 7,000
Market cap: $15.6bn
LTM Revenue: $6.27bn
LTM EBITDA: $1.99bn
LTM EV/Revenue: 3.76x
LTM EV/EBITDA: 11.81x
Company Details: PNM Resources
PNM Resources is an energy holding company, with consolidated operating revenues of $1.5bn in 2019. Through its regulated utilities, PNM and TNMP, PNM Resources has approximately 2,811 megawatts of generation capacity and provides electricity to approximately 790,000 homes and businesses in New Mexico and Texas.
Headquarters: Albuquerque, New Mexico, USA
CEO: Pat Vincent-Collawn
No. of employees: 1,600
Market cap: $3.92bn
LTM Revenue: $1.46bn
LTM EBITDA: $0.66bn
LTM EV/Revenue: 4.96x
LTM EV/EBITDA: 11.33x
This acquisition will turn Iberdrola’s North American arm (Avangrid) into one of the biggest players in the US utilities industry, with 10 regulated electricity firms in six states, as well as the third-largest renewable energy operator in the US, with a total presence in 24 states.
Iberdrola expects the acquisition to provide the group with a lower cost of capital and economies of scale, yielding immediate benefits for the new combination after the deal is materialised. Active in New Mexico and Texas, PNM gives Iberdrola a route to expand its regulated business beyond the U.S. northeast.
Iberdrola’s investment in the renewables resources sector highlights that the company is willing to adjust to the current economic situation, which positively impacts the outlook of the firm. Companies like Iberdrola are trying to gain an early edge as the market shifts toward low-carbon energy, a trend that has only gained pace amid the global pandemic.
With the rapid growth of the renewables industry, Iberdrola is confident in its ability to capture a reasonable share of this growth, with 5% to 10% of onshore wind and solar share in the areas where it operates. In offshore wind, the current leading position allows the firm to capture between 15% and 25% as a result of ongoing investments in the sector. With this transaction, the Iberdrola Group accelerates its growth through the 8th corporate transaction since the beginning of the Covid-19 pandemic following acquisitions in France (St Brieuc and Aalto Power), in Australia (Infigen), offshore wind companies in Sweden and Japan and onshore wind projects in Scotland and Brazil.
The pandemic has also seen U.S. utilities look harder at consolidation to cut costs and spur investment. At the end of last month, Iberdrola reported nine-month net profit growth of 4.7% and said it still expected growth of mid to high-single digit in 2020. This proves that ongoing investments in the renewables sector and expanding firm’s operations to new locations are the key drivers for Iberdrola’s growth. In essence, the short-term upsides include increased market share, exposure and greater asset diversification.
With regard to the long-term upside potential of this transaction, synergies play a crucial role in creating value. The deal is said to add about €500m to Iberdrola’s earnings before interest, tax, depreciation and amortisation, and more than €120m to its net profit. This operation aligns to the strategy that Iberdrola has been following for over 20 years, including “friendly transactions, focused on regulated businesses and renewable energy, in countries with good credit ratings and legal and regulatory stability, offering opportunities with good credit ratings and legal and regulatory stability, offering opportunities for future growth”.
The acquisition of PNM Resources will give it a platform for further growth in the Southwest, including regulated generation assets that do not need to scrap for an offtake agreement and transmission lines critical for bringing power to market. New Mexico has the third-largest potential for both wind and solar generation of any U.S. state. Those resources remain largely untapped making the acquisition lucrative for Iberdrola.
PNM could also benefit from Avangrid’s renewables experience as it works to cut emissions. A plan has now been approved to close its coal-fired San Juan plant in 2022, Iberdrola said. The Spanish company also hopes to benefit from the EU’s €750bn coronavirus recovery fund, in which the transaction to clean energy is a priority. The combination of Avangrid and PNM will manage more than 4.1 million supply points, a regulated asset base (RAB) of $14.4 billion, more than 168,000 km of networks and approximately 10.9 GW of installed capacity. Overall, the acquisition will enable Iberdrola to grow in the regulated utility business, primarily transmission and distribution, and renewables, increase exposure in good rated countries (AAA), immediately accretive to earnings and maintain the company’s financial strength.
Risks and uncertainties
Despite the fact that PNM Resources’ board of directors has shown unanimous support for the deal, a major hurdle for Iberdrola to close the deal on time will be gaining the necessary approval from the US company’s shareholders, which has provisionally been set at Q4 2021. The all-cash offer price, the $50.3 per share deal at a 10% premium to Tuesday’s closing price, though “broadly in line with other integrated US utilities”, is still at a 10% discount to the pre-Covid high earlier this year. With increasing pressure to invest in cleaner forms of electricity generation and infrastructure improvements, efforts among US utilities to consolidate are heating up. Although PNM didn’t provide any further details regarding potential competing bids, considering the recent endeavour of NextEra in acquiring Duke Energy, it’s reasonable to assume that there could be other energy giants willing to offer a more competitive offer. In this case, Iberdrola may need to further improve its offer price to get the transaction done.
Moreover, with a bid to expand its renewable capacity in the US, it’s worth noticing that the acquisition of PNM is far from a “green” deal. Although PNM has just solidified its plans to accelerate the exit from its 200-megawatt-capacity ownership in the Four Corners Power Plant and remains committed to the approved abandonment of Sun Juan Generating Station in 2022, it’s still a company with more than 60 per cent regulated generation capacity in coal and gas. This could pose risks surrounding the timeline and smoothness of an energy transition post-acquisition.
However, the merger between Iberdrola's subsidiary Avangrid and PNM Resources still looks promising and doesn't involve any significant obstacles. The reasons are twofold. First, the two company's service lines, expertise, management teams and consumer markets seem to fit together seamlessly. For example, Avangrid’s experience in clean energy could prove valuable to PNM and on the other hand, Texas and New Mexico’s geographical position means Avangrid would rank third among US states for wind and solar energy potential. Second, despite the required regulatory approval and subjected antitrust scrutiny, the resulting company will not have vertical or horizontal market power and therefore won’t have any adverse impacts on the market such as increased rates or cross subsidisation.