Analysts see only minimal impact on Spanish utility Iberdrola SA after subsidiary Avangrid Inc. terminated its $8.3 billion acquisition of PNM Resources Inc. on Jan. 2, bringing an end to a more than three-year pursuit of the New Mexico utility.
Despite securing multiple federal and state approvals, the transaction fell down after the companies failed to get clearance from the New Mexico Public Regulatory Commission, which first rejected the deal in December 2021.
The merger agreement was extended to Dec. 31, 2023, as the companies awaited a state Supreme Court decision on an appeal. That deadline has now passed, and Avangrid refused a further extension.
Iberdrola's stock price rose by a little over 1% in early-morning trading in Madrid on Jan. 2 before settling near the Dec. 29, 2023, closing price by midafternoon. PNM's stock was down about 5.7% in heavy trading just prior to noon ET on Jan. 2.
Executives at the Spanish utility, which owns an 81.5% stake in Avangrid, had long highlighted the multiple approvals the companies had already secured for the acquisition and, as recently as October 2023, continued to express confidence a deal would get over the line.
While that hope is now quashed, analysts do not expect significant ripple effects from the termination.
"From an Iberdrola perspective, PNM was never a 'must do,' transformative acquisition," CreditSights analysts said in a Jan. 2 note. "It fit with Iberdrola's networks and renewable energy (despite the small amount of coal-fired generation at PNM), but in the context of the Iberdrola group PNM was small."
Indeed, the acquisition's implied enterprise value of about $8.3 billion compares to an enterprise value of €138.33 billion for Iberdrola, according to S&P Global Market Intelligence data.
Meanwhile, the original deal announcement in 2020 put PNM's full-year EBITDA at $586 million in 2019. In contrast, the S&P Capital IQ consensus estimate for Iberdrola's full-year 2023 EBITDA is €14.65 billion.
Avangrid's US networks businesses serve about 3.3 million customers at eight electricity and natural gas utilities in Connecticut, Maine, Massachusetts and New York. PNM serves about 800,000 electricity customers through two regulated utilities in New Mexico and Texas.
Analysts at RBC Capital Markets said the acquisition of PNM would have had a positive EPS impact for Iberdrola of at least 3%.
CreditSights analysts said the deal's termination would free up resources for Iberdrola's management and give the Spanish utility slightly more financial flexibility in the short term.
In the longer term, it could mean Iberdrola redirects focus onto other targets. Executives stated on the company's most recent earnings call that they see "lots of opportunities right now in the US" — including transmission networks, repowering renewables assets and offshore wind.
Avangrid has secured more than $9 billion of capital projects in the three years since the PNM deal was announced. Among those developments is Vineyard Wind, the first large-scale offshore wind project in US waters.
"[The] failure of PNM could mean that there is increased risk Iberdrola may seek a 'replacement' US acquisition," the CreditSights analysts said. "However, Iberdrola has historically been very financially disciplined, so even if it does look at further acquisitions, we would expect them to be structured to preserve the current [credit] rating."
Morgan Stanley analysts said they see the Spanish utility as having "more investment options than can be funded" — one of the reasons they see the company selling stakes in its fleet of offshore wind projects.
The analysts added that the capital devoted to the PNM deal will be reallocated to other growth areas, pointing to a Reuters report from November 2023 that said Iberdrola was planning to bid for UK power distribution network operator Electricity North West Ltd.
"While neither company has commented, we would observe this possible option represents a similar network inorganic route for similar transaction size," the analysts said in a Jan. 2 note.
