M&A advisors are getting richer as more and more utility companies consolidate. recently announced that it was going to buyout, making a $5.6 billion dollar bet on a rebound in Nevada’s economy. Nevada’s economy got hammered during the recession with unemployment going up over 12% and its housing bubble popping.
Now Nevada has an unemployment rate of 9.6% which still is the highest in the United States, but Berkshire is betting that will continue to go down. As the economy rebounds, demand for electricity and natural gas heating will increase, boosting profits. Berkshire’s acquisition should enable it to continue to grow in the utility market, and meaningfully grow its book value.
Berkshire had $49 billion cash on hand which wasn’t making shareholders any richer. Using that money to grow the business is far more efficient than having it sit in a bunch of very conservative low yielding investments. Buying out NV Energy (NYSE:NVE) was a good idea for two reasons: One, because even after the 23% premium, it was trading at a book value of 1.56, less than the 1.67 industry average. Second, it will allow Berkshire to grow at a faster rate and will add more EPS to Berkshire, increasing its value.
The industry has been going through a period of consolidation over the past few years. Last year Exelon Corporation (NYSE:EXC) bought out Constellation Energy for $8 billion and NRG Energy Inc (NYSE:NRG) bought out GenOn Energy for $1.7 billion. Berkshire tried to buy Constellation Energy back in 2008, but the deal didn’t go through.
Maybe future consolidation is the future of energy and utility companies. TECO Energy, Inc. (NYSE:TE), which has a market cap of $3.8 billion, and recently bought smaller competitor New Mexico Gas Company for $950 million ($750 million for the company, $200 million for the debt,) could be a target.
TECO Energy, Inc. (NYSE:TE) would be a perfect candidate to be bought out because it is far smaller than the other players such as MidAmerican Energy, Berkshire’s subsidiary in the utility market with $66 billion in assets. TECO Energy, Inc. (NYSE:TE) also has almost $3 billion in debt, but a company like MidAmerican could refinance that debt at a lower rate and move into the Florida market easily.
TECO Energy, Inc. (NYSE:TE) has 687,000 customers and operates largely in the Florida market, which has seen unemployment drop significantly and a strong rebound in home prices. Florida’s unemployment rate is at 7.2%, below the national average (7.5%,) and has gone down by 0.8% over the past 6 months.