Please ensure Javascript is enabled for purposes of website accessibility

This Top-Tier Utility Stock Is Considering an Acquisition Binge

By Matthew DiLallo - Apr 7, 2020 at 9:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

NextEra Energy is reportedly working on a second M&A transaction.

NextEra Energy (NEE -0.59%) has a long history of making acquisitions that move the needle for shareholders. In 2016, for example, the company bought several assets from fellow utility Southern Company, including Gulf Power, which should boost its earnings per share by $0.15 this year and another $0.20 in 2021. It has already taken steps to secure its next purchase after emerging as the recommended bidder for troubled South Carolina utility Santee Cooper. 

On top of that, it has reportedly hired advisors to help prepare an offer for Evergy (EVRG 0.55%), which is under activist pressure to sell. If it's successful on both deals, NextEra Energy will supercharge an already high-powered growth plan. 

A handshake over an electric generating facility.

Image source: Getty Images.

Putting on the pressure to perform

Evergy is a utility that provides power to customers in Kansas and Missouri. The current company formed in 2018 as a result of the merger of KCP&L and Westar Energy. That combination, however, hasn't created value for investors. This underperformance led activist investor Elliott Management to build a sizable position in the company and push it to make changes. 

Elliott outlined two paths for creating value. The first option included replacing the management and board and focusing on an investment plan that would increase spending on infrastructure and optimize its operating costs. The other option is to pursue a strategic combination with another utility in a stock-for-stock merger.

Evergy has since settled with Elliott by appointing two new members to its board. It also outlined a five-year $7.6 billion capital plan to grow its earnings. However, the board also established a strategic review committee to explore ways to enhance shareholder value, which could include a merger. Several utilities are looking into a potential transaction with Evergy, including NextEra, American Electric Power, and Ameren. NextEra is in the preliminary stages of its exploration of a merger and might not submit a formal bid.  

A shift in focus

NextEra's reported openness to bid on Evergy as well as its recent offer to buy South Carolina's Santee Cooper demonstrate a noticeable change in the company's strategy. Currently, it operates two utilities in Florida -- Florida Power & Light and Gulf Power -- as well as a competitive energy business that owns clean energy assets across the country. One of its focuses in recent years has been on snapping up utilities in its home state. In addition to buying Gulf Power, it also recently acquired the municipal electric system of Vero Beach. On top of that, it reportedly bid on a municipal utility in Jacksonville, Florida, last year, but that entity's board rejected all offers.  

However, acquisitions of Santee Cooper and Evergy would extend the geographical focus of the company's utility segment beyond the state of Florida. That comes with some risk as it wouldn't be able to integrate either entity into its existing operations. 

On the other hand, those deals could richly reward investors given NextEra's knack for improving the operations of acquired assets. In one year alone, it has increased Gulf Power's adjusted earnings by more 25%. The company sees a similar upside potential at the poorly run acquisition targets. At Santee Cooper, for example, it envisions the possibility of investing $2.3 billion to transform it into a lower cost, cleaner utility by replacing coal plants with natural gas and solar. Meanwhile, Evergy is spending money on wind projects, which does create some synergies with NextEra's energy resources segment. NextEra's track record of making high-return clean energy investments could enable it to create more value for investors if it bought these utilities.

However, the company doesn't need either deal to grow shareholder value in the near term. It already anticipates that its earnings will increase by 6% to 8% per year through 2022, plus the added boost from Gulf Power. That's one of the fastest rates in the utility sector. As such, its ability to secure either transaction would bolster an already strong growth profile. Though that assumes no major impact from the COVID-19 outbreak and the likely economic recession in the coming months. 

Interesting storylines to watch

NextEra Energy is working on expanding its utility operations beyond the borders of Florida by bidding on Santee Cooper and reportedly considering making an offer for Evergy. Neither transaction is a sure thing right now, but it shows that the company is open to expanding in new areas if it can find opportunities that could create additional value for its investors. That makes these pursuits interesting storylines to watch because its success in securing either acquisition could enhance the company's ability to continue generating market-beating total returns for its shareholders.

Matthew DiLallo owns shares of NextEra Energy. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$89.71 (-0.59%) $0.53
Westar Energy, Inc. Stock Quote
Westar Energy, Inc.
EVRG
$71.33 (0.55%) $0.39

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.