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Fortis’s ITC Holdings Acquisition: Could It Have Been Overpriced?

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Active mergers and acquisitions in utility sector

In 2015, the utility sector witnessed brisk merger and acquisition activities. These activities mainly aim to strengthen resource and infrastructure bases to enhance geographical reach. Large caps are trying to attain accelerated growth through mergers and acquisitions by paying heavy premiums for their target companies, well above the industry standards.

Shares of Fortis corrected by nearly 10% on February 9, 2016, reacting to analysts’ comments of its ITC Holdings acquisition being overpriced. ITC Holdings also dropped, by 2%, when the deal was announced.

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Advantages to Fortis

ITC is a purely regulated transmission utility with a healthy rate base growth. In the next five years, ITC’s rate base is expected to increase by 7.5%, compounded annually. Rate base is the value of a property on which a utility (VPU) is allowed to earn a specific rate of return according to the rules set by regulators.

According to Fortis, ITC Holdings is projected to contribute 5% of its earnings from 2017. Incremental earnings after the acquisition are expected to support an average annual dividend growth of 6% through 2020. After the transaction, Fortis will become 15th-largest utility in North America by enterprise value.

The deal has taken place amid dismal growth in the electric business due to weak demand. However, the deal is still a welcome move by Fortis as ITC Holdings is the only pure-play regulated transmission utility in the United States. As transmission earnings are not directly dependent upon consumption, Fortis sees the deal as less risky in the weakening consumption environment.

There have been a lot of corporate actions seen in the utility (JXI) space over the last year. Dominion Resources (D) recently acquired Questar Corporation (STR) in order to fortify its gas segment, Duke Energy (DUK) is acquiring Piedmont Natural Gas (PNY), and Southern Company (SO) is acquiring AGL Resources (AGL).

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