Shares of Algonquin Power & Utilities (AQN +1.11%) have gotten pummeled over the past year, falling nearly 45%. The company has run into trouble as it seeks to execute its long-term energy transition strategy. Those issues led the company to slash its dividend to conserve cash and help balance its investment spending.
One key to the company's strategy is acquiring Kentucky Power from AEP (AEP 0.62%). However, regulators might not approve that deal. While that's seemingly bad news for the company, Bank of America analyst Dariusz Lozny believes that outcome would be a positive for the beaten-down utility stock.
Trying to get the deal across the finish line
In October 2021, Algonquin Power & Utilities' subsidiary Liberty Utilities agreed to acquire Kentucky Power and AEP Kentucky Transmission (collectively Kentucky Power) from AEP. It initially agreed to pay $2.846 billion, including the assumption of $1.221 billion of debt. The company expected the deal to be accretive to its earnings per share in the first year and support its transition to cleaner energy.
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However, due to regulatory issues, the deal still hasn't closed more than a year later. Algonquin and AEP have since revised the transaction price to $2.646 billion as they continue to work with regulators on approval.
The two companies recently filed a new application with the Federal Energy Regulatory Commission (FERC) seeking approval of the deal. They believe the new application addresses concerns that the regulator previously raised and are asking for an expedited review so they can close the transaction by their April 26th deadline.
A case for not closing
Algonquin Power & Utilities reiterated its support for the deal when it provided a business update for investors in mid-January. It continues to believe the acquisition will add to its rate base, grow its customer connections, and provide further opportunities to decarbonize.
However, investors and analysts think the deal will add too much debt. The company is working to address those concerns by cutting its dividend payment by 40% (a stark reversal following a 6% increase last year) and selling other assets. It set a target to sell $1 billion of assets, using that capital to fund new investments and reduce debt. It completed its first transaction last fall, selling a 49% interest in a portfolio of wind energy assets for $227 million.
The company has many more assets it could sell, including its stake in Atlantica Sustainable Infrastructure. RBC analyst Shelby Tucker recently upgraded shares of Atlantica on the view that Algonquin will sell its stake because that stock had been under pressure due to its parent's issues. Unfortunately, instead of providing a boost, these moves have only put more downward pressure on the stock price.
Meanwhile, despite all the efforts to close the deal, Bank of America's Dariusz Lozny has doubts that it will close. The analyst believes this outcome would be a "net positive" for the stock even though Algonquin would pay a $65 million breakup fee, since it would reduce the near-term pressure on the company's balance sheet.
This belief recently led the analyst to upgrade Algonquin shares all the way to buy from underperform. The analyst also set a $9 price target, believing that a failed deal would be an upside catalyst for the beaten-down stock.
However, while a failed deal would take some pressure off Algonquin's balance sheet, it would reduce its long-term growth visibility. It's not clear what direction the company would take from there.
It's hard to get excited about this stock
While Algonquin Power & Utilities believes its Kentucky Power deal will boost its earnings and accelerate its energy transmission, investors, analysts, and regulators don't like the acquisition. Because of that, the company might be better off if the deal fell apart, since it should take some pressure off its balance sheet and stock price in the near term.
However, that potential catalyst doesn't make the stock worth buying, since Algonquin could end up closing the deal. Meanwhile, if the deal falls apart, there's no real long-term growth catalyst. On top of that, the company's reduced dividend is an issue, since dividend cutters have historically underperformed companies with the power to steadily grow their payouts. That lack of a clear path forward makes the stock unappealing for long-term investors.
