Empire District finds Canadian buyer

Last edited 1:43 p.m., Feb. 29, 2016

Empire District Electric Co. is poised to enter a new era as a regional hub for an international utility company after announcing Feb. 9 a $2.4 billion sales agreement with a Canadian firm.

Joplin-based Empire District Electric Co. (NYSE: EDE) acknowledged in December it was courting potential buyers before Oakville, Ontario-based Algonquin Power & Utilities Corp. (TSX: AQN) emerged with a proposal unanimously approved by the boards of both publicly traded companies. Algonquin Power, which is listed on the Toronto Stock Exchange, plans to make Empire District a subsidiary of Liberty Utilities Co., Algonquin’s U.S. utility operation.

The move comes as EDE explored its options to increase shareholder value after the costly 2011 Joplin tornado and the recently stayed federal Clean Power Plan were looming.

Subject to regulatory approval, the transaction would give EDE shareholders $34 per common share – a 21 percent premium compared to the company’s Feb. 8 closing price. The purchase agreement had the opposite effect on Algonquin’s stock, which dipped by 8 percent in early trading the day after the deal was announced.

Algonquin Power CEO Ian Robertson said in a Feb. 17 interview the dip in Algonquin’s stock was expected as a result of an equity offering the company made in connection with the announced deal. That offering raised $1.1 billion toward the purchase price.

The buyout was attractive, Robertson said, because it adds to Liberty Utilities’ regional utility assets. Liberty operates two utilities in eastern Missouri – Jackson and Butler – as well as central U.S. sites in Arkansas, Illinois, Iowa and Texas. EDE operates in the Show-Me State, Arkansas, Kansas and Oklahoma.

“We’re obviously active in Missouri and Arkansas in the regulated utility business and have a presence in the water and natural gas distribution business in both of those states. And Empire has a big presence in Missouri and Arkansas, so there’s definitely an overlap in experience,” Robertson said, adding Liberty works largely in rural areas, so administrators felt it would be a good cultural fit.

Under the terms of the deal, Empire District would keep its name for at least five years, as well as its headquarters in Joplin, which Robertson sees as a future regional hub for Liberty. Launched in 2000, Liberty operates utilities in 11 states from California to Massachusetts.

“We’ve basically built the business through acquisitions,” Robertson said.

Compared to most electric utilities, he said both Empire and Liberty are smaller firms.

“They have about 220,000 customers, and we have around 600,000 customers, so we think there is value in scale in terms of being able to provide better service,” Robertson said.   

Julie Maus, director of communications for Empire District Electric, said adding scale to its operations was a motivating factor in the board’s pursuit of a buyer.

“There wasn’t just one particular reason that they looked to evaluate strategic alternatives. Their responsibility is to look at all available options out there in the best interest of the company at all times,” she said. “Looking at Empire’s size, we are probably one of the smaller investor-owned utilities in the industry. Certainly, that presents some challenges in terms of size, economies of scale. And having a smaller geographical area, does pose some challenges in terms of dealing with things such as the May 22, 2011, tornado.”

Representatives of EDE’s two largest shareholders, mutual funds Vanguard Group Inc. and BlackRock Fund Advisors, declined to comment.

In the deal, Algonquin would assume Empire District’s roughly $900 million debt load.

In December, Standard & Poor’s gave EDE a BBB credit rating as news broke the company was considering a sale. According to the agency, a BBB rating “exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.”

Algonquin also is rated BBB. Listed at $10.44 per share on Feb. 16, Algonquin shares are up from under $8 three years ago, but down 4.3 percent year-to-date.

EDE shares three years ago traded below $21.50 and in January 2014 hit a high-water mark of $31.25 before falling to $20.76 a share in September. then climbing to $28.05 on Feb. 9.

The payout to EDE’s over 4,000 shareholders would total $1.5 billion.

Maus said there were other undisclosed interested buyers, but the scales tipped to Algonquin with the offer keeping its Joplin headquarters and no planned staff cuts.

Jim Goettsch, an attorney with Husch Blackwell LLP in Kansas City, represented Algonquin in the proposal, leading a team of 10 attorneys behind-the-scenes to iron out the agreement.

“The terms of the deal were themselves not very complicated. But anytime a public company is acquired by another entity, it’s a complex process,” Goettsch said, adding public utility companies have to provide value to both shareholders and customers.

“Particularly for the Empire folks, it was important for them to be very hands on in the process, to understand who Algonquin was and how they would be the right fit not only for the shareholders of Empire, but also for its customers.”

Goettsch has worked with Algonquin in several U.S. acquisitions since 2010 as the company grew the Liberty division.

“This is the largest,” Goettsch said of the EDE deal, noting he’s worked on acquiring utility assets in eight states from California to New Hampshire.

He said the process is similar each time. Typically, introductions and preliminary negotiations often occur without attorneys, and then the lawyers come in for formal negotiations and due diligence. In the EDE deal, his team worked with the parties involved for about a month before the proposal was announced publicly.

On the financing side, he said Husch Blackwell attorneys recommended and worked with a Boston-based law firm on a four-bank bridge loan up to $1.6 billion, and the Kansas City lawyers also were involved in the Algonquin equity offering that raised $1.1 billion.

Maus said the deal is expected to take nine to 18 months to close because four sets of state regulators, the Federal Electric Regulatory Commission and shareholders have to agree to the terms.

A shareholder vote on the sale price is a key step in the process. A date would be set for their vote after Empire files a proxy statement with the Securities and Exchange Commission, which is expected in 60 days.