Great Plains Energy (NYSE:GXP) (GPE) and Westar Energy (NYSE:WR) on May 4 filed a petition with the Kansas Corporation Commission (KCC) requesting reconsideration of the KCC’s April 19 order, which denied the companies’ June 2016 joint application that sought approval for GPE’s acquisition of Westar.
As noted in the April 19 order, GPE last May announced that it had reached a definitive agreement to acquire 100% of the stock of Westar and Kansas Gas and Electric (Westar) in a transaction then valued at about $12.2bn, including assumed debt.
“The commission is not opposed to mergers as evidenced by its approval of two acquisitions within the past six months,” the KCC said in its order. “As one of the intervenors notes, in many ways a merger between GPE and Westar makes sense, but for one insurmountable obstacle – the purchase price is simply too high. The commission agrees.”
The proposed transaction is not a merger of equals, but an acquisition with an excessive purchase price, requiring GPE to take on significant debt, the KCC said, adding that the $4.9bn acquisition premium exceeds GPE’s $4.8bn market capitalization by $100m.
“Unfortunately, the transaction was presented to the commission as a take it or leave it proposal,” the KCC said. “Repeatedly, the joint applicants advised the commission that any significant safeguards that would protect consumers, such as maintaining a separate, independent Westar Board of Directors, would halt the transaction. Therefore, the proposed transaction could not be salvaged and the commission is left with no choice but to reject the proposed transaction.”
In their May 4 petition, the companies requested that the KCC set the matter for further proceedings so that they may continue efforts to possibly:
- Revise the transaction to address the KCC’s concerns related to purchase price, capital structure, and other issues
- Provide additional information for discovery by KCC staff and other parties to address concerns raised by the KCC in the order
In a May 4 statement, the companies noted that the petition requests additional time until May 31 to allow further discussions between the companies to determine if a mutually agreeable revised transaction might be negotiated that resolves the concerns that the KCC has identified, while preserving meaningful benefits for customers and shareholders.
The companies said in their petition that in working to develop a revised transaction proposal, they fully understand that in order to permit a KCC determination that the revised transaction proposal promotes the public interest:
- The purchase price must be lower than originally proposed
- The GPE capital structure must contain a lower proportion of debt than originally proposed
- Quantifiable customer benefits – such as transaction savings – must be demonstrated
The KCC expressed other significant concerns in the order, including a commitment to staffing levels at Westar’s headquarters building in Topeka. The companies added that assuming that they are able to develop a revised transaction proposal that solves the purchase price, GPE capital structure, and quantifiable customer benefits concerns, the companies will also present additional information to address each significant concern noted in the order in a revised transaction proposal.
Noting that they completed integration planning in April, the companies said that detailed integration plans and savings estimates have been fully developed and are now available for review and evaluation by the parties, as well as presentation to the KCC.
GPE Chairman and CEO Terry Bassham in the May 4 statement said that GPE and Westar continue to firmly believe that combining the companies creates significant value for customers, employees and communities in Kansas and Missouri, as well as for shareholders.
“We have heard the commission regarding the structure of the transaction, including its concerns related to purchase price, capital structure, quantifiable and demonstrable customer benefits, and staffing levels in Westar’s service territory,” he added, in part. “Given the unique benefits resulting from our combination, we believe it is appropriate to explore whether there is room to work with Westar and directly address these areas, while maintaining the shareholder value creation opportunity inherent in this merger. In any case, we would only pursue a revised agreement if we determined that it delivered more value than Great Plains was able to achieve on a stand-alone basis.”
Westar President and CEO Mark Ruelle said in the statement: “A combination of these two companies and the efficiencies it would create helps address the headwinds of rising costs for our customers. We are hopeful we can reach a revised agreement that paves the way for the completion of our transaction and the realization of its many customer benefits.”