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SKARBECK: Vectren deal is a huge winner for its shareholders

April 27, 2018

Investing by Ken SkarbeckA tip of the cap to the board and management of Evansville-based Vectren on the sale of the company to Houston-based CenterPoint Energy. Vectren shareholders will receive $72 in cash for their shares. In total, CenterPoint is paying $6 billion in cash and assuming $2.5 billion in debt for a total deal value of $8.5 billion.

The deal’s announcement was accompanied by the familiar slew of press releases issued by class action attorneys fishing for plaintiffs to sue Vectren for breach of fiduciary duty and selling the company for less than it’s worth. Frankly, those allegations are laughable. Vectren shareholders are getting top dollar in this deal.

The valuation of this transaction is stunning. Vectren is selling its business, a regulated utility, for a whopping 25 times earnings in a period of rising interest rates.

Utilities have had a good run in this bull market. The Dow Jones utility average more than doubled since March 2009, for an 8.6 percent annualized rate of return. Add in the ample dividends utilities pay, and total returns approach 12 percent for the past nine years.

Vectren’s stock has clobbered the utility index in the last 18 months, rocketing 46 percent versus only 3.3 percent for the index.

Vectren’s utility revenue and profit is approximately 60 percent natural gas and 40 percent electric (coal). Natural gas is, at present, the coveted fuel in the utility industry. The cash shareholders will receive is a culmination of a business that has performed very well over the past decade.

Yet by almost any financial measure, CenterPoint is paying a very rich price. Shelling out a growth-stock-like value for a regulated business that must consistently reinvest large amounts of cash into its infrastructure might not bode well for CenterPoint shareholders going forward.

Also, utilities are often said to have bond-like characteristics, since regulators allow them to earn stable, fixed rates of return, from which a large percentage is paid out in dividends. With the United States transitioning to a period of rising interest rates, the outlook for utility stocks (and for bonds) appears challenging.

Finally, it is instructive to compare the Vectren acquisition with another Indiana utility deal that took place nearly two decades ago—the dreadful acquisition of central Indiana utility IPL by AES Corp. That merger occurred at the top of the internet bubble market. Unfortunately, instead of a cash payment, IPL shareholders received massively overvalued shares of AES in exchange for their stock. An IPL shareholder who held onto AES shares for 17 years has lost 72 percent since the March 2001 merger.

The sad irony is that IPL remains a healthy, thriving company as a subsidiary of AES.

Had the merger never occurred, its stock might now be worth at least double the $22.89 per share that was converted in March 2001 into AES shares (instead of its post-merger value of $5.55 in AES stock today), while also distributing 68 quarterly dividends.

Investors involved in a merger must pay close attention to the business valuations of both the buyer and the seller—and the method of payment used for the acquisition.

Consider selling if the terms are unfavorable. A good merger strives for fair values for both parties.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 317-818-7827 or ken@aldebarancapital.com.

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