Indiana utility, IPALCO Enterprises Inc.'s, long search to become a growth company ended Monday. But IPALCO is not buying another utility as it tried to do years before.
It�s being bought by much bigger independent power producer AES Corp. IPALCO, an electric utility holding company, will be acquired by AES in a stock-for-stock transaction valued at about $2.15 billion, plus assumption of $890 million of debt.
While global power company AES is only offering $25 a share or a 16% premium over the closing share price of $21.50 on July 14, IPALCO is not exactly a powerhouse of growth.
�The price is on the low end,� says Gerald Keenan, partner with PricewaterhouseCoopers in Chicago. �IPALCO didn�t have a lot of choices.�
Electricity industry deregulation in Indiana is going nowhere slowly and the state itself is not in a growth mode, compared to other regional markets in the Southwest or in New England. IPALCO owns Indianapolis Power & Light, an integrated utility that serves 433,000 customers in and around Indianapolis. There are no utilities that geographically constrained IPALCO could afford to buy that make sense.
IPALCO failed in a bitter battle with Cincinnati Gas & Electric Co. to buy neighboring utility PSI Energy Inc. about 7years ago. Cincinnati Gas & Electric succeeded and formed Cinergy Corp., Cincinnati, Ohio.
AES gets some 3,000 Mw of low-cost, coal-fired generation assets, existing power plant sites for expansion, and a distribution business in the transaction, says Keenen.
In addition, water for cooling and disposal is becoming a more important issue in siting gas-fired generating plants. Existing sites and permits are becoming more valuable as the demand for generation continues to outstrip available supply.
Scale and scope
The AES-IPALCO transaction is a continuation of ongoing industry consolidation. Experts agree that electricity is a business of scale and scope. In November 1999, AES bought Cilcorp. Inc., Peoria, Ill., for $885 million.
Houston-based Dynegy Inc. merged with Illinova Co., Decatur, Ill. earlier this year. Low stock prices relative to earnings are making utilities more attractive takeover targets. Investors such as Warren Buffet, whose Berkshire Hathaway Inc. bought utility holding company MidAmerican Energy Holdings Co., Des Moines, are also looking for diversity.
�Our view for sometime has been that few companies in electricity will remain in only one part of the value chain,� Keenan says. �There is a reliable earnings stream out of the distribution business. They throw off a lot of cash. It�s not a bad business.�
AES, Arlington, Va., used its valuable stock currency for this merger. The global power company�s stock is trading at a price to earnings multiple of almost 47, compared to IPALCO�s multiple of about 9.6.
Under terms of the agreement, each share of IPALCO will be exchanged for a number to be determined of AES shares in order for IPALCO holders to receive a fixed value of $25 a share.
AES will be issuing about 43 million shares or about .50 AES shares per IPALCO share. The final exchange ratio will be determined 5 business days before closing based on the average daily closing prices of AES for the preceding 20 trading days.
Pending regulatory and shareholder approvals, IPALCO will become a wholly owned subsidiary of AES.