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Is Another Energy Megamerger on the Horizon?

By Travis Hoium – Jul 5, 2016 at 11:08AM

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A big Texas utility could be on the market, and it could be a good buy for a few other big utilities.

Image source: Getty Images.

There's a big utility asset waving in the wind, and some big names are reportedly after it. Low interest rates and relatively slow growth in electricity demand in the U.S. have led to companies buying each other in an effort to gain scale, diversify, or grow, and sometimes all three.

Could another utility be on the blocks, setting up another megamerger in energy?

The new big fish in utilities

Oncor Electric Delivery is the big fish I'm talking about; it's a component of the now bankrupt Energy Future Holdings Corp. The company had agreed to be sold to Hunt Consolidated from bankruptcy, but that deal fell apart when a judge ruled that tax benefits from the acquisition would have to be shared with customers. 

The business is primarily a transmission and distribution infrastructure play in Texas, where the company serves more than 3 million homes and businesses with 119,000 miles of electric lines. Assets like that don't become available often, and the list of potential acquirers of the $17 billion to $18 billion business is a Who's Who of growing utilities. According to Bloomberg, there are seven bidders on Oncor, including NextEra Energy (NEE 0.44%), Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%), and Edison International (EIX -0.23%). All are interested in buying the utility to grow and diversify their own energy businesses.

Transmission and distribution in Texas can be an attractive market for utilities, because it's a regulated business that's unlikely to be disrupted by rooftop solar, utility-scale wind and solar, or the decommissioning of power plants.

Everyone needs power lines

A number of factors have crept into the utility business over the past decade to threaten the traditional business model. Rooftop solar allows customers to create their own electricity, and net metering complicates rate structures. Both regulation and low-cost natural gas have caused the closure of hundreds of coal and nuclear power plants that reduce utility returns. To top it off, customer demand for electricity has essentially stopped growing.

Amid all of those challenges, everyone still needs power lines -- and that's exactly what Oncor brings to its potential bidders. That's why it's such a sought-after asset for utilities and conglomerates that have the capacity to fund the purchase.

Look for more mergers in energy

Given the challenges facing electric utilities across the country, I would look for more mergers ahead; NextEra, Berkshire Hathaway, and Edison International are three of the potential buyers for these assets. Maybe Oncor will be the next big fish which one of them buys.

Travis Hoium owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Berkshire Hathaway Stock Quote
Berkshire Hathaway
$477,402.98 (0.07%) $317.98
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$316.15 (0.10%) $0.31
Edison International Stock Quote
Edison International
$65.37 (-0.23%) $0.15
NextEra Energy Stock Quote
NextEra Energy
$85.20 (0.44%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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