What: Shares of Questar (NYSE: STR) are up 22% as of 11:00 a.m. ET today on the news that Dominion Resources (NYSE:D) has made a $4.4 billion offer to buy the company. Similarly, shares of Dominion and its subsidiary partnership Dominion Midstream Partners (NYSE: DM) are down 2% and 7%, respectively, following the announcement.
So what: If the deal goes though -- it still needs Questar shareholder approval and Federal Trade Commission approval -- Dominion would buy Questar for $25 per share. And, big surprise, today's price surge puts the company's shares within pennies of Dominion's offer price. As a regulated gas utility, Dominion expects Questar to be a source of steady earnings and cash flow that are immediately accretive to earnings.
Certainly, bringing on a company with a regulated business and stable revenue stream is a plus, but shareholders of Dominion and Dominion Midstream Partners seem less optimistic about the deal in general for two primary reasons. Firstly, the company is already stretched a little thin debt-wise, and there are fears that bringing on Questar could exacerbate those issues. The company has said it also plans on using a combination of debt and equity at both Dominion and Dominion Midstream Partners to get the deal done -- management envisions several of Questar's gas distribution pipelines getting dropped down to Dominion Midstream.
The other reason investors may be a little shy about this deal is that there isn't much regional overlap, which suggests there aren't a whole lot of opportunities for cost savings and operational efficiencies.
Now what: If you didn't own shares of Questar already, there's probably no point in going in now. Dominion plans to pay cash for Questar's shares, and its stock has already baked in the acquisition price. Further down the road, investors in Dominion and Dominion Midstream should keep close tabs on how the deal is ultimately financed, how that financing impacts the company's balance sheet, and whether the combined company can eek out any cost savings. If Dominion can't deliver on these three things, you may want to shy away from this stock.