A New Mexico Supreme Court decision denying PNM Resources Inc. and Avangrid Inc.'s request to remand a case back to state regulators concerning their proposed merger increases the likelihood the two utilities will terminate the deal, some industry analysts said.

The merger, first announced in October 2020 and with an overall transaction value of $8.3 billion, may not be authorized until 2025 given the legal process ahead, according to Wells Fargo Securities, which added in a May 16 report: "Deal termination is an increasingly likely outcome."

"While we think [Avangrid] remains motivated/committed to the deal, we are less sure about PNM," Wells Fargo analysts wrote. "Considering the deal was originally announced in Oct. 2020, we believe it is becoming increasingly difficult for PNM's board to continue with the transaction given the lack of a clear path forward for getting the matter in front of the new [New Mexico Public Regulation Commission]."

The state Public Regulation Commission (PRC) rejected the merger in December 2021, and the companies appealed that decision to the state Supreme Court in 2022. In the meantime, the state remade its elected PRC into a commission appointed by the governor, a change that took place in January under Gov. Michelle Lujan Grisham, who has publicly supported the deal.

In March, the companies joined the PRC in asking the court to return the case to the commission for rehearing, but the court denied that request May 15. PNM shares fell 5.53% that day to $45.12, while the Iberdrola SA subsidiary's shares fell 2.61% to $39.95, both on heavy volume. Avangrid's stock price fell another 3.25% on May 16, while PNM units were largely unchanged.

Siebert Williams Shank & Co. LLC analysts agreed that "the parties may have little choice but to abandon the merger with potentially another large chunk of a year of additional uncertainty ahead." But even if the transaction falls through, they noted, a stand-alone PNM still provides value for incremental investors.

Avangrid and PNM have already agreed to extend the timeline for the deal to July 20, but analysts at Morningstar told clients they believe "the ultimate outcome would be the same," even with additional extensions.

Mizuho said the companies will likely agree to a year-end deadline and that the PRC will approve the merger in time. CreditSights agreed the Supreme Court decision is not a "final blow."

"In the near term, we still see enough positives at [Avangrid] as a stand-alone entity (including a strong balance sheet) if the PNM deal falls through," CreditSights analysts said, adding that "this lost regulated earnings boost becomes more of a concern as [Avangrid] continues ramping up its non-utility renewables/offshore wind business."

The court set a hearing date for oral arguments Sept. 12 and has no statutory deadline for making a decision in the case.

In April, Avangrid CEO Pedro Azagra told investors the company remains committed to the merger.

"We're not speculative financial investors that buy some sales in a second; we are long-term, and the value of a utility is long-term," Azagra said during a first-quarter 2023 earnings conference call. "We believe we did a transaction with a very good presentation from a value point of view. I think PNM has been delivering. Earnings [are] actually better than they were expecting. So there is no change in our appetite."

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