The NorthWestern Energy Board of Directors has voted unanimously to reject the unsolicited proposal made over a week ago by a coalition of municipal entities to take over the company -- which emerged from bankruptcy last year -- through a stock buyout, the company said in a Thursday morning press release. By later the same day the coalition had issued its own press release saying it was undeterred.
The board for the combined electric and gas utility said the proposal by the non-profit corporation, Montana Public Power Inc. (MPPI), was not in the best interests of the stockholders or customers. The muni group had offered to buy 100% of the common stock at $32.50 per share in cash for a total transaction value of $2 billion, which includes the assumption of $825 million of NorthWestern's debt (see NGI, July 4). MPPI made the public offer after it said a private offer to the board was rejected.
Montana Power includes municipal groups that were active in NorthWestern's bankruptcy action, which was mostly completed last November. The company just recently settled on the sale of former communications services subsidiary Netexit Inc., formerly Expanets (see NGI, July 4). Since NorthWestern emerged from Chapter 11 last fall with a new set of shareholders, the public power advocates argue that the company's new owners aren't interested in the long-term operations of the company, but are investment firms that buy distressed companies, guide them through Chapter 11, and sell their interests to make quick profits.
The cities claimed that they collectively can buy the utility operations without having to raise retail rates. MPPI said its offer represents a 17% premium to NorthWestern's unaffected closing stock price on April 28, the day before MPPI's intentions to purchase NorthWestern were made public. The non-profit organization's sole member is the Montana Public Power Authority, which is comprised of the cities of Bozeman, Great Falls, Helena and Missoula, along with the consolidated city/county government of Butte-Silver Bow, Montana.
However, in a letter to MPPI Chair Mike Kadas, NorthWestern's Chairman Linn Draper said after evaluating the proposal with its legal counsel and financial advisor, the board concluded "the MPPI acquisition proposal presents unacceptable risks that raise doubt as to whether the transaction would reach closing." MPPI's proposal uses a financing plan that has no equity and a 100% leveraged debt structure that would be collateralized by NorthWestern's customers and utility assets with no recourse to the consortium of communities participating in Montana Public Power, Inc., with only a"best efforts" commitment from Citigroup, the letter said.
Even if the transaction closed, NorthWestern noted the proposal would require a separate transaction to sell the company's South Dakota and Nebraska assets to a nonprofit corporation called South Dakota Power Co.
The letter said "the power and utility industry is rife with examples of transactions that have been announced only to fail to close as a result of legal, regulatory or other developments. In those cases, value has been harmed as strategic direction was necessarily stalled during the pendency and opportunities were necessarily lost, a consequence made worse since utility industry mergers tend to require 12-18 months (or more) to reach closing."
The board also concluded that the financial consideration reflected in the MPPI acquisition proposal was not adequate and not compelling as compared to NorthWestern's stand-alone value proposition.
Kadas shot back that MPPI's offer represents a premium of 45%-85% to the per share equity value of NorthWestern estimated by its financial advisor less than 12 months ago, and a multiple of 22.4x NorthWestern's projected 2005 earnings. This compares with average multiples of 17.4x 2005 earnings for comparable regulated utilities with a focus on transmission and distribution, which are trading close to all-time highs, MPPI noted.
MPPI said it has received a commitment letter from Citigroup in an amount sufficient to consummate the transaction. MPPI's projected coverage ratios are consistent with investment grade credit ratings. "MPPI anticipates a relatively straightforward approval process that we believe will, with NorthWestern's cooperation, allow the transaction to close by year-end."
MPPI said that it is "well-positioned" to satisfy the criteria established by the Montana Public Service Commission in evaluating any sale of NorthWestern. It also noted that the Montana Attorney General has issued a draft opinion that there are no legal impediments precluding MPPI from acquiring NorthWestern.
"MPPI has the support of its local communities," the muni group added. "In fact, a poll of Montana voters indicated support for public ownership of NorthWestern by a 2-to-1 margin."
Draper, however, pointed out that Northwestern "emerged late last year from a successful restructuring that focused the company strictly on its core utility business and significantly reduced its debt burden. It has since become clear that the company has an improved cash flow and earnings profile, enhanced opportunities associated with business rationalization and improving regulatory relationships, along with other positive factors." Draper said that on "an ongoing basis, our stand-alone plan calls for substantial capital investment to ensure the long-term provision of reliable and cost-efficient service."
Michael J. Hanson, NorthWestern's CEO, pointed out that NorthWestern has shown significant financial and operational progress since emerging from bankruptcy in November 2004. "NorthWestern is a financially stronger company with significantly lower debt and an improving credit profile as evidenced by the recent improvement in credit ratings and/or outlooks by Fitch, Moody's and Standard and Poor's," said Hanson.
"Since November 2004, we have reduced debt an additional $145 million, which leaves NorthWestern with total debt outstanding of $766 million and a debt to capitalization ratio of approximately 51%. MPPI's proposed transaction would reverse that progress and increase NorthWestern's debt to approximately $2 billion."
Hanson added, "Throughout our restructuring, NorthWestern's employees have worked hard to provide reliable and high quality customer service. Our utility operations are stable, and we are investing significant amounts of capital in the ongoing improvement of our infrastructure in Montana, South Dakota and Nebraska." NorthWestern has 310,000 electric power customers and 166,000 natural gas customers.
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