Avangrid Inc. and sponsor Iberdrola SA face an uphill climb to salvage the proposed $4.32 billion acquisition of PNM Resources Inc. after New Mexico state regulators rejected the deal.
Wall Street analysts believe Avangrid could challenge in court the New Mexico Public Regulation Commission's 5-0 vote on Dec. 8 against the proposed merger, which marks yet another example of the difficulty of closing large-scale U.S. utility M&A. With approvals from five federal agencies and Texas regulators, Avangrid and PNM only need the PRC's approval to close the merger.
Avangrid shares closed down about 4% Dec. 9 at $48.75, but PNM climbed 0.6% to finish the day at $44.94.
The deal would be a significant win for Avangrid, which also faces setbacks in Maine after voters rejected its under-construction, 145-mile New England Clean Energy Connect transmission line, and the state suspended a key permit for the project. Avangrid is challenging the ballot measure in court and is also grappling with several operational issues at its Central Maine Power Co. subsidiary.
"If parties are really committed, I don't think they give up the ghost that easily," Barclays Power and Utility Research Director Eric Beaumont said in an interview, pointing to Westar Energy and Great Plains Energy Inc., whose combination formed Evergy Inc. That merger was initially rejected by the Kansas regulators in 2017 before a revised deal won approval in 2018. "As to whether it ultimately gets consummated, I do get concerned that the regulators are entrenched," Beaumont added.
Europe's Iberdrola, according to Beaumont, is sending the message that it will take the dispute to the New Mexico Supreme Court to resolve what it perceives to be a political issue. PRC Chairman Stephen Fischmann earlier in December called the deal "fool's gold" that would not pay off for customers of PNM utility subsidiary Public Service Co. of New Mexico. A hearing examiner also recommended against the merger, saying its potential harms outweigh benefits to the public despite support from the state attorney general as well as several unions, environmental groups and businesses (PRC Docket No. 20-00222-UT).
PNM's options
It may not be in PNM's best financial interest to drag out the Avangrid merger process, Wells Fargo Securities told clients in a Dec. 9 note, unless both companies "were willing to live in limbo until '23 when the PRC transitions to a three-person appointed commission and perhaps the governor's support for the deal carries more weight." New Mexico Gov. Michelle Lujan Grisham has expressed support for the deal, saying it would help the state meet its emissions reduction goals.
Avangrid has the bigger disadvantage, Barclays' Beaumont said, since pausing construction on the Maine transmission line requires the company to pursue "additional avenues of regulated growth" to help bolster credit metrics amid a push to invest in more solar and wind development.
According to Wells Fargo Securities, the commission's decision "boiled down to [Avangrid] being the wrong buyer and not the PRC being philosophically opposed to PNM getting acquired." PNM, it continued, "had one of the more attractive small-cap electric growth stories with an ESG appeal to boot, and we believe that story is still intact and likely to appeal to dedicated utility investors."
Beaumont, however, disagreed that other suitors might attempt to scoop up PNM in the aftermath of the acquisition's rejection.
"I do think that with failed deals people will come out of the woodwork, but I think there will be some severe skepticism about this commission," he said.
M&A fatigue
The New Mexico commission "applied largely arbitrary reasoning" that further reinforces deal-making hesitancy, Sophie Karp, director of KeyBanc Capital Markets' utilities and alternative energy research, told clients Dec. 8.
"Another failed ... deal in the space again highlights the peril of large-scale regulated utility M&A," Karp wrote, making the appetite for future transactions "even less appealing."
Under the merger agreement, the deal may be terminated by either party under certain circumstances, including failure to consummate by Jan. 20, 2022, subject to a three-month extension.
If Avangrid terminates the deal due to a change in PNM board recommendation or if PNM terminates the deal to accept a superior proposal, PNM will have to pay Avangrid a termination fee of $130 million. If one of the companies terminates the deal due to a failure of a regulatory closing condition or if Avangrid fails to close the deal when all conditions have been met, Avangrid will have to pay PNM a termination fee of $184 million.
Another recent utility deal that ran aground on the rocks of regulatory opposition was Hydro One Ltd. and Avista Corp., which in January 2019 terminated their proposed merger after Washington and Idaho regulators rejected Hydro One's $5.3 billion bid, forcing the Ontario utility to pay Avista a $103 million fee. Regulators in Alaska and Montana approved the deal but a subsequent executive shakeup at Hydro One, initiated by Hydro One's biggest shareholder — the Ontario provincial government — delayed actions in Idaho, Oregon and Washington as regulators there questioned the influence the Ontario government might have over a combined company.