In the early 1990s, bankruptcy looked like a distinct possibility for UniSource Energy Corp.
UniSource's CEO has said, on a variety of occasions, that his company is "too small to be big and too big to be small."
In response, he has sought growth through acquisition. But he also understands there comes a time to "fold 'em." That time might be now.
In the regulated world of electric and gas utilities, capital is king. And that appears to be the main driver behind the $853 million offer for UniSource. The buyer is a group of well-heeled private equity players: KKR, J.P. Morgan Partners, and Wachovia Capital Partners. And the financing group has agreed to pony up $260 million in additional capital. This should make state regulators very happy.
Apparently, private equity groups see potential in utilities. Cash flows are fairly predictable, which makes it easier to pay on debt. Longer-term, demographics will have significant impacts. UniSource, for example, will continue to benefit from growth in the Arizona region as high-tech companies move in. Retirees are coming in, as well.
This type of long-term growth appeals to private-equity investors more so than public shareholders who seem more interested in quarter-by-quarter results. So, don't imagine this deal is some kind of a fluke. Last week, private equity firm Texas Pacific Grou, purchased Portland General Electric from Enron for $1.25 billion.
It sounds more like a trend.
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Tom Taulli is the author of six books on investing and finance, such as the Complete M&A Handbook (Random House). He is also a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at [email protected] .
