American Electric Power Co. Inc. took an important step forward in its business transformation with the sale of a minority stake in its transmission businesses, Wall Street analysts said.
American Electric Power (AEP) will sell a 19.9% equity interest in its AEP Ohio Transmission Co. Inc. and AEP Indiana Michigan Transmission Co. businesses to a 50/50 strategic partnership between New York-based KKR & Co. Inc. and Canada's Public Sector Pension Investment Board, or PSP Investments, for $2.82 billion, the utility company announced Jan. 9.
"While the sale of a minority interest in a transmission subsidiary was not unexpected, we're impressed with the magnitude of the proceeds and with the valuation of the deal, which is immediately accretive to EPS (we expected a deal to be dilutive) and mitigates (but doesn't eliminate) planned equity needs," Scotia Capital (USA) analyst Andrew Weisel wrote in a Jan. 10 research report.
AEP executives on a November 2024 earnings call said the company would consider asset sales to help alleviate $5.35 billion in equity needed to fund its $54 billion capital investment plan for 2025–2029.
Columbus, Ohio-headquartered AEP said the transmission sale represents a 30.3x multiple compared to the price-to-earnings ratio for the last 12 months and is a "significant premium" to the company's current stock price. AEP's stock closed at $92.26 on Jan. 8, the last full day of trading before the deal announcement.
"The stated 30.3x multiple is above the floor of 25x but certainly not as attractive as prior deals" involving NiSource Inc. and FirstEnergy Corp., Guggenheim Securities analyst Shahriar Pourreza wrote in a Jan. 10 note to investors.
The analyst, however, said the valuation "shouldn't be a surprise given that the capital markets environment has further deteriorated since those deals were announced."
Earnings accretion is expected to be about 1.7% over the next five years, analysts noted.
"The deal on one hand isn't a game changing deal as the company will still need to issue some equity, which will likely be through its [at-the-market] program which is not systematic, and it is modestly accretive despite the fact our numbers are slightly lower than the company's assumptions," Pourreza wrote. "On the other hand, this ticks another execution box" for AEP President and CEO Bill Fehrman.
Wall Street has reacted positively to other moves made by Fehrman, who took the helm as AEP's CEO on Aug. 1, 2024.
Among the notable changes is the hiring of industry veteran Trevor Mihalik as the company's new executive vice president and CFO, effective Jan. 20.
"We expect the new finance head to be focused on executing the strategy laid out by CEO Bill Fehrman and the board of directors rather than to make meaningful changes to it," Weisel wrote.
The analyst added that it is "unclear if additional asset sales should be expected."
"We would not be surprised to see more, but don't expect management to telegraph such potential moves, unlike the prior management team," Weisel wrote.
The transmission stake sale, expected to close in the second half of the year, is subject to approval from the Federal Energy Regulatory Commission and clearance from the Committee on Foreign Investment in the United States.
"While we appreciate and agree with the strategy to further improve the balance sheet and regulatory relationships, it now seems to us that, while the plan will position AEP well for the long-term, the steps to be taken may weigh on near-term investor sentiment, limiting upside for earnings and shares," Weisel wrote.
