In a move that would diversify Fortis Inc., and make ITC Holdings (NYSE:ITC) part of the Canadian firm, the companies have agreed to a deal valued at US$11.3bn in which Fortis will acquire ITC in a cash and stock transaction, the companies said Feb. 9.
Assuming shareholder and regulatory approvals are received, the companies expect to close the deal by the end of 2016, with ITC owning 27% of the combined company, officials said during a Feb. 9 conference call discussing the deal with financial analysts.
The deal would combine the U.S. and Canadian utility assets of Fortis, which is based in St. John’s Newfoundland and Labrador, with the transmission asset business of ITC, which is based in Novi, Mich., the officials noted.
It would “dramatically diversify” Fortis by adding transmission assets regulated by FERC “in the heartland of the U.S.,” and elsewhere that are clearly poised for growth due to the addition of renewable resources and environmental rules being implemented, Barry Perry, president and CEO of Fortis, said during the call.
“This is an ideal cultural fit for us,” added Joseph Welch, chairman, president and CEO of ITC, who said that Fortis provides a strong platform to execute ITC’s growth plan.
The deal has been approved by the boards of both companies, but will require shareholder and regulatory approvals, officials noted.
ITC will maintain its headquarters in Novi, Mich., and current management, Welch said during the call, acknowledging that it will be part of a larger company, which carries some risk compared with ITC’s current structure.
“Our first order of business is to convince the ITC shareholders that their continued investment in the combined company is the thing that they should do,” Welch said, noting that he and Perry will spend plenty of time in the coming months nurturing shareholder approval of the deal.
Under the terms of the transaction, ITC shareholders would receive US$22.57 in cash and 0.7520 Fortis shares per ITC share. At the Feb. 8 closing price for Fortis common shares on the Toronto stock exchange and the U.S./Canadian exchange rate, the per share consideration represents a premium of 33% over ITC’s unaffected closing share price on Nov. 27, 2015, and a 37% premium to the unaffected average closing price over the 30-day period prior to Nov. 27, 2015.
As TransmissionHub reported, at the end of November 2015, ITC said its board of directors began a review of strategic alternatives, which “may result in the company’s possible sale or pursuit of other initiatives to maximize value for shareholders.”
The financing of the deal has been structured to allow Fortis to maintain a solid investment-grade credit rating and is consistent with Fortis’ existing capital structure, the companies said in a Feb. 9 statement. Financing for the cash portion of the acquisition will be achieved primarily through the issuance of approximately US$2bn of Fortis debt and the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors, according to the statement.
Fortis is confident in its ability to attract an infrastructure investment firm, Perry said during the call.
The companies expect an investor to own between 15% and 19.9% of ITC to achieve the financing needed, added Karl Smith, executive vice president and CFO of Fortis. “We feel there is tremendous demand for high-quality assets of this nature,” Smith said in reference to ITC.
The companies plan to seek state regulatory approvals in Illinois, Kansas, Missouri, Oklahoma and Wisconsin, officials said during the call. They do not anticipate needed approvals from regulators in Iowa, Michigan or Minnesota.
Applications for regulatory approvals will be filed no later than 120 days from the Feb. 9 announcement, according to the companies.
There is significant transmission infrastructure that needs to be built in the areas where ITC operates, with environmental regulations leading to a significant change in the U.S. generation fleet that will require substantial transmission investment, Perry said during the call.
In connection with the transaction, Fortis will apply to list its common shares on the NYSE, the companies said in a Feb. 9 statement.
On a pro forma basis, the deal would boost the consolidated mid-year 2016 rate base of Fortis by approximately US$6bn to about US$18bn.
With existing utility assets in the U.S. and Canada, Fortis will be able to tap some of the transmission expertise at ITC and compete for some grid enhancement projects across North America, Perry said. “I’ve challenged all of our management teams to find incremental ways to grow the company in the energy infrastructure space,” he said during the call.
"Fortis has grown its business through strategic acquisitions that have contributed to strong organic growth over the past decade," Perry said in the statement. “Our performance in 2015 is a clear demonstration of the success of this strategy.”
"The acquisition of ITC – a premier pure-play transmission utility – is a continuation of this growth strategy,” Perry said in the statement. “ITC not only further strengthens and diversifies our business, but it also accelerates our growth. The predictable returns of a transmission business, with no commodity or fuel exposure, are very compelling.”
Welch said in the statement, "From the very beginning of ITC, we have been focused on creating meaningful value for all stakeholders, including customers, investors and employees, by becoming the leading electric transmission company in the U.S."
He continued: "Fortis is an outstanding company with a proven track record of successfully acquiring and managing U.S. based utilities in a decentralized manner. This transaction accomplishes our objectives by better positioning the company to have a higher level of focus on pursuing our long-term strategy of investing in transmission opportunities to improve reliability, expand access to power markets and allow new generating resources to interconnect to transmission systems and lower the overall cost of delivered energy for customers.”
In addition to the necessary state approvals, the closing of the acquisition is subject to ITC and Fortis shareholder approvals, the satisfaction of other customary closing conditions, and certain regulatory and federal approvals including, FERC, the Committee on Foreign Investment in the United States, and the U.S. Federal Trade Commission/Department of Justice under the Hart-Scott-Rodino Antitrust Improvement Act.