What: Shares of Empire District Electric (NYSE: EDE) jumped more than 16% by 11:30 a.m. EST on Wednesday. Sparking the rally was the announcement that the company was being acquired by Canadian-based Algonquin Power & Utilities (TSX:AQN).
So what: Empire District Electric has agreed to be acquired in an all-cash deal for $34 per share, valuing the company at $2.4 billion. That purchase price represents a 21% premium to the company's closing price on Monday and is 50% above its closing price in early December, which was before the company announced that its Board of Directors was in the early stages of exploring strategic alternatives. In other words, this merger agreement is outcome of that process.
This transaction is the second acquisition by a Canadian-based utility of a U.S.-based utility this week, with Fortis' (TSX:FTS) agreement to buy ITC Holdings (NYSE:ITC) for $6.9 billion in cash-and-stock the other deal. Driving these cross boarder acquisitions is the fact that U.S. utilities are allowed by regulators to earn larger profits than Canadian utilities can earn. For example, ITC Holdings is allowed by FERC to earn a return on equity of 13%, which is much higher than the 9% that Fortis is allowed to earn. Further, Canadian buyers have cheaper access to financing, enabling them to pay more than U.S. companies can pay. That suggests that there won't likely to be any competing bids emerging to trump the agreed upon transactions.
Now what: This transaction will require a pretty lengthy regulatory process and Empire District Electric doesn't expect the deal to close until the first quarter of 2017. Not only do state commissions need to approve the deal, but because it is a cross-border deal Federal regulators need to approve it as well. That lengthy and complex approval process adds to the risk that the deal might fall through, which is why existing shareholders are better off cashing in now since this is an all-cash deal, even if they are leaving a little money on the table.