Two Huge Energy Acquisitions Highlight the Day on Wall Street
GE and Exelon are putting billions of dollars to work in an effort to grow their businesses.
On a day when Wall Street is less than ecstatic about slow GDP growth and the Federal Reserve's continued tapering of bond purchases, energy companies are buying each other in a continued consolidation of the industry.
On a broad level, economic news wasn't very good today with an initial reading of first-quarter GDP up only 0.1%, hurt by both bad weather and falling government spending. Slow growth isn't good for the economy or corporate earnings, but it was also expected, so the Dow Jones Industrial Average (DJINDICES:^DJI) took it in stride and climbed 0.3% in late trading.
The bigger news came out of energy, where two buyouts were front and center.
GE wind turbines blow in the distance, one of the many electricity generation assets GE sells to utilities.
Buying up energy companies
Alstom said today that it would endorse General Electric's (NYSE:GE) $17.1 cash bid for its energy assets. This would give GE an even larger presence in power plant turbines and other grid services, which it sees as a long-term growth engine.
GE isn't getting a steal at an estimated 7.9 time pro forma EBITDA, but the company is also trying to swallow a competitor with the deal. That's why Siemens has also sought the Alstom energy unit.
The winner will have a great opportunity to build natural-gas plants around the world, which will be in high demand as environmental regulations reduce demand for coal and countries shy away from building new nuclear capacity.
Further down the energy food chain, Exelon (NYSE:EXC) today made a $6.8 billion offer to buy Pepco Holdings (UNKNOWN:POM.DL) in an effort to reduce reliance on the wholesale power market. Exelon would also become the largest power distributor in the country if the deal goes through.
Utilities are facing challenges from falling electricity usage, renewable energy, and low-cost natural gas. Diversification is one way to keep any of those factors from affecting a business too harshly. Consolidation is common as industries reach a state of decline, and while utilities aren't going to go away anytime soon they aren't viewed as growth investments by any means.
GE and Exelon's acquisitions come for very different reasons but say a lot about the energy sector. GE is betting that natural-gas power plant demand will increase over the long term and is adding more grid services to repair an aging grid, while Exelon is trying to protect its profits by increasing exposure to regulated markets versus the wholesale power market. Both are probably wise moves, but it will take years to see major financial impacts for investors.