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Aussie's Babcock & Brown Buys NorthWestern After Multiple Offers

From among more than a half-dozen suitors, Sydney, Australia-based Babcock & Brown Infrastructure (BBI) emerged last month as the new owner of South Dakota-based utility holding company NorthWestern Corp. in a $2.2 billion deal completed April 25 that will leave the American management and strategies in place. NorthWestern's CEO told the financial community he expected the deal to close quickly early next year.

Under the financing plans announced so far, NorthWestern will not take on additional debt, but BBI will issue an additional $505 million in debt in addition to absorbing NorthWestern's debt, estimated at $740 million.

Standard & Poor's Ratings Services reacted to the deal's added debt by saying it was placing NorthWestern's current "BB+" corporate credit rating on "CreditWatch with negative implications," a step down from where it was previously. Since neighboring South Dakota energy company, Black Hills Corp., made a high profile play for NorthWestern last December, S&P had called NorthWestern's outlook "developing."

In mid-2005, following its emergence from a successful reorganization under Chapter 11 and several quarters of improving financial performance, NorthWestern received several informal proposals from parties who were interested in buying the company. NorthWestern's board in November 2005 directed senior management and its financial adviser to commence an evaluation of all strategic alternatives to maximize value for all stockholders.

In announcing the sale, BBI and NorthWestern committed to maintaining strong relationships with the communities and the regulators in Montana, South Dakota and Nebraska, and they met with them later in the week to answer questions. "BBI has indicated an intention to ensure local management accountability with a focus on a continuation of excellent customer service," NorthWestern said in a prepared statement The sale is subject to the approval of NorthWestern's shareholders and customary regulatory approvals expected in 2007. Upon closing NorthWestern will cease to be a publicly traded company and will become a locally managed subsidiary of BBI.

The agreement has a termination date of two years, but the companies said they expect to close the deal "long before that time," sometime next year.

A definitive proxy statement on the proposed sale will be sent to NorthWestern shareholders, prior to their vote on the deal, and the company will be announcing first quarter financial results this week (May 4), according to NorthWestern CEO Mike Hanson. He stressed that BBI's proposal was "superior to all the others received by the company's board," including long-standing offers from a public-sector coalition of cities in Montana and neighboring Black Hills Corp.

As part of a detailed merger/acquisition process established last December, a special subcommittee of NorthWestern's board contacted 23 potential parties designated as "qualified," Hanson said. This included 15 strategic investors, and 10 parties signed confidentiality agreements, with eight of those submitting bids. Six ultimately were asked to participate in the final (binding offer) round, he said. Montana Public Power and Black Hills were among five submitting binding bids.

BBI officials from Australia emphasized that the utility investment firm is a "long-term, conservative utility owner, with a proven track record of owning and investing in energy transmission and power generation assets." The company's business approach emphasizes local management. Hanson said that there are so-called "break-up fees" as part of the sales agreement in case one of the companies decides to back out of the deal. For BBI, it would pay NorthWestern $70 million; conversely, if NorthWestern backed out, it would pay $50 million to BBI.

"We're very pleased that this board-led process has yielded a very positive outcome for stockholders, one that is far superior to the unsolicited proposals received in 2005, and the best value for our shareholders among the proposals we received as part of this process," said Hanson, who thinks the B&B deal also presents "far less risk" to NorthWestern's stockholders and the communities its serves in electric and natural gas utility operations in Montana, South Dakota and Nebraska.

Nevertheless, S&P subsequently noted some reservations, and the need to further analyze the sale's credit impact after more facts are known about the financing. "The ratings were originally placed on "Credit Watch developing" last Dec. 6 after Black Hills offered to acquire NorthWestern," S&P credit analyst Gerrit Jepsen said in a prepared statement. "The [revised] negative CreditWatch reflects our opinion that NorthWestern's credit measures, which now adequately support the 'BB+' rating, would weaken after the transaction closes due to the incremental $505 million of debt."

In a separate statement, Black Hills' CEO David Emery reiterated that when his company made its offer for a "strategic merger" last fall he believed a Black Hills-NorthWestern combination offered "incomparable benefits to customers, communities, employees, regulators and shareholders." Nevertheless, Black Hills' bid in the recently concluded strategic review process failed to win over the NorthWestern board.

"While the combination provided a unique opportunity, it was just one of many opportunities we are pursuing to increase long-term returns to our shareholders," Emery said. The company is now concentrating on its Wygen II coal-fired power plant, obtaining permitting to build a Wygen III power plant, and developing the company's existing oil/gas properties, including the recently acquired Piceance Basin in Colorado.

NorthWestern has been promised by BBI all the capital it needs in its electric and gas transmission and distribution infrastructure. In Montana, NorthWestern operates 7,000 miles of electric transmission lines and associated terminal facilities with five major interconnections to other parts of the Western Electric Coordination Council (WECC) reliability area covering 14 western states, two Canadian provinces and the northern part of western Mexico, including North Baja.

Hanson said that the companies feel the deal meets the stipulation of NorthWestern's Chapter 11 bankruptcy reorganization two years ago with the Montana Consumer Counsel, and the Montana Public Service Commission, including the evaluation factors outlined by the Montana regulators.

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