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Evergy strategic review could be setting up utility for M&A

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Essential Energy Insights - February 2021

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Evergy strategic review could be setting up utility for M&A

Some analysts see a merger transaction as the likely path for Evergy Inc. to pursue in its strategic review with Elliott Management Corp. as the hedge fund pushes to boost shareholder value at the midwestern utility.

Evergy and Elliott on March 2 announced an agreement to improve the utility's value proposition two months after the hedge fund pressured the company to abandon its share buyback program and consider alternative business plans. Options include a merger transaction and "standalone operating plan and strategy" to "unlock" up to $5 billion in value at Evergy.

Under the agreement, a strategic review committee will explore options for financial growth. Evergy President, CEO and Director Terry Bassham and current board director Art Stall will work with former Energy Future Holdings Corp executive Paul Keglevic and NRG Energy Inc. Executive Vice President and CFO Kirk Andrews — who were installed as board members at Elliott's behest to solicit at least one initial proposal or indication of interest from third parties on a potential deal, according to the committee's charter.

"We continue to gravitate towards the merger review as the strongest area of interest to investors and note that it is devoted more space in the charter vs. the latter option," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a March 2 report.

Given the committee charter agreements, "we see potentials suitors now stepping in with less pushback." Pourreza previously named NextEra Energy Inc. and Ameren Corp. as "logical suitors," while Exelon Corp. could be a "potential dark horse."

Glenrock Associates LLC analyst Paul Patterson said although Evergy executives provided little detail about the review during the utility's recent earnings call, "the elephant in the room is 'would there be the potential for M&A?'"

"The reason why is we're looking at a market where there is considerable interest in utility properties," Patterson said in an interview. The low-interest rate environment and premiums on top of high price-to-earnings ratios have made these companies attractive, but corporate M&A has become harder due to lack of targets.

Most recently, Florida municipal utility JEA and South Carolina government-owned power provider Santee Cooper seemed like the two biggest targets for a potential acquisition, with utilities including NextEra and Duke Energy Corp. expressing interest. But JEA's sale solicitation went back on the shelf due to governance controversies and South Carolina lawmakers have rejected NextEra's most recent offer, potentially making Evergy the next takeout candidate.

"You have a variety of players who are interested, whether it be infrastructure players or whether it be traditional utility companies or utility holding companies that would be looking to expand," Patterson said. "Of course, what comes to mind are the ones that have been visibly doing so in the past."

But Evergy and any potential suitors could face pushback on a deal proposal from regulators in Missouri and Kansas, according to Morningstar analyst Charles Fishman. When Great Plains Energy Inc. initially tried to acquire Westar Energy Inc. in 2016, the Kansas Corporation Commission rejected the deal in 2017 for being "too risky" financially and not in the public interest.

The companies then pursued "a merger of equals" and formed Evergy to address concerns.

"That merger was more difficult," Fishman said in an interview. "I just don't see an infrastructure fund buying Evergy, or at least getting approval there. They're a little old-fashioned."

The "best merger" would be with a company like Ameren, which operates in Missouri and neighboring Illinois, because it could provide operational efficiencies with Evergy under one corporate umbrella to benefit ratepayers, Fishman added. But Evergy may be better off focusing on its new, five-year, $7.6 billion capital spending plan.

"They stepped up their investments in Missouri and that is certainly a positive," he said. "There is no question about it."