Westar Energy (NYSE:WR) and Great Plains Energy (NYSE:GXP) (GPE) on July 10 said that both companies’ boards of directors have unanimously approved a revised transaction that involves no premium paid or received with respect to either company, no transaction debt, no exchange of cash, and is a stock-for-stock merger of equals, creating a company with a combined equity value of about $14bn.
The “transaction will be debt-free, directly addressing a major concern voiced by the KCC, the Kansas commission in its April order denying the original application,” GPE Chairman, President and CEO Terry Bassham said during a July 10 conference call, which was webcast.
As TransmissionHub reported, the Kansas Corporation Commission (KCC) on May 23 denied the May 4 petition filed by GPE and Westar, in which the companies requested reconsideration of the KCC’s April 19 order that denied the companies’ June 2016 joint application, which sought approval for GPE’s acquisition of Westar.
As noted in the KCC’s May 23 order, GPE in May 2016 announced that it had reached a definitive agreement to acquire 100% of the stock of Westar Energy Inc., and Kansas Gas and Electric (Westar) in a transaction then valued at about $12.2bn, including assumed debt. The joint application seeking approval for GPE’s acquisition of Westar was filed on June 28, 2016, the order noted.
The KCC noted that it issued its order on April 19 denying the proposed transaction and explaining that “[a]fter a thorough examination of its merger standards, the commission concludes the proposed transaction is not in the public interest. The proposed transaction fails not only to meet the majority of the merger standards, but it fails to meet the most important of the factors.”
Specifically, the KCC said that it reasoned that the proposed transaction was too risky because the excessive acquisition premium calls into question GPE’s ability to service the transaction-incurred debt, leaving GPE little margin for error to maintain its investment grade rating. The joint application, the KCC added in its May 23 order, did not give the KCC adequate assurances that GPE would be able to service the newly incurred debt without raising rates or reducing services.
The companies on May 4 filed their petition for reconsideration, and on May 9, regulatory staff filed its response to that petition, advising that the petition be denied because it contains no allegation of error.
“[O]ur companies have adjacent service territories and complementary operating expertise, which, when combined, will create a leading Midwest electric utility that is better positioned to serve our stakeholders,” Bassham said during the call. “Together, we will have more than 1.5 million customers in Kansas and Missouri, nearly 13,000 MW of generation capacity, almost 10,000 miles of transmission lines, and over 51,000 miles of distribution lines. The company will have one of the largest wind generation portfolios in the country, representing nearly 1/3 of its retail sales. Including nuclear output, nearly half of the utility’s retail sales can be produced with zero emissions.”
According to the companies’ July 10 statement, they would merge to form a new holding company, which would operate regulated electric utilities in Kansas and Missouri. Operating headquarters would be in Topeka, Kan., and Kansas City, Mo., the companies said, adding that corporate headquarters would be in Kansas City.
Under the terms of the agreement, Westar shareholders would exchange each share of Westar common stock for a share in the new holding company, the companies said, adding that GPE shareholders would receive .5981 shares of common stock in the new holding company for each GPE share. The transaction has a total equity value of about $14bn, and it is structured to permit a tax-free exchange of shares, the companies said, noting that no transaction debt would be incurred.
The exchange ratio reflects the agreed-upon ownership split between the two companies, the companies said, adding that following completion of the merger, Westar shareholders would own about 52.5%, and GPE shareholders would own about 47.5% of the combined company.
The agreement provides that, upon closing, the new holding company expects to set its initial common dividend at a level that maintains the current dividend for GPE shareholders, resulting in about a 15% dividend increase for Westar shareholders, the companies said.
In connection with the agreement, GPE would redeem all of the previously issued debt and convertible preferred stock that it issued in contemplation of the previous plan to acquire Westar, the companies said.
Due to the revised nature of this transaction, GPE and the Ontario Municipal Employees Retirement System (OMERS) have agreed to terminate their preferred convertible equity commitment, the companies said. After those financial transactions are completed, the companies anticipate that GPE would have not less than $1.25bn in cash on its balance sheet. The companies added that after the closing of the merger, the combined company anticipates repurchasing common stock to return excess cash to shareholders and maintain a balanced consolidated capital structure.
Upon closing of the transaction, Westar President and CEO Mark Ruelle would become the non-executive chairman of the new company board, while Bassham would serve as president and CEO of the new company, as well as a member of the board of directors.
The companies further noted that senior management roles would be shared by executives from both companies, and that the board of directors would consist of an equal number of directors nominated from each company.
Discussing financial and strategic benefits, the companies said that they expect the merger to be accretive to their respective standalone earnings per share in the first year after closing and accretive thereafter. They also noted that upon closing, Westar shareholders would see an immediate dividend uplift of about 15% and GPE’s current dividend would be maintained; the companies expect dividend growth in line with earnings and a pro forma payout ratio of 60-70%.
The merger would position the combined company to deliver top quartile total shareholder returns with the company targeting compounded annual earnings per share growth of 6-8% from 2016-2021, the companies said. In addition, with no transaction debt, the companies expect that the combined company would have a strong balance sheet and long-term credit metrics that support an improving investment grade rating.
The companies also said that complementary and contiguous service territories, shared generation assets, and expanded footprint are expected to create cost savings and net operating efficiencies of about $35-45m in 2018, growing to $140-170m by 2021 and beyond.
The company would provide a minimum of $50m in total rate credits for all customers upon the closing of the transaction, the companies said, noting that the credit, which exceeds the expected net savings in 2018, would be given to customers as a one-time reduction. Thereafter, cost savings resulting from the merger efficiencies would benefit customers through the normal regulatory process, the companies noted.
The transaction would create opportunities for the companies to leverage their combined resources and stronger balance sheet to maintain already strong customer service levels, the companies said.
In addition, the combined company has committed that there would be no layoffs as a result of the transaction, the companies said, noting that any employee reductions related to the merger would be accomplished through attrition and normal retirements from GPE and Westar.
Ruelle said during the call that the transaction is “structured to address regulators’ concerns … and creates a company unburdened by transaction debt with great assets, good operations, and a strong leadership team.”
He also noted that in rejecting the original deal, the KCC was unequivocal in its objections.
“The terms of this new deal mean regulators in both Missouri and Kansas can be confident in the benefits the transaction brings for customers in their respective state, without the … concern [about] debt being used to finance it,” he said.
Ruelle added, “Our preliminary discussions with regulatory staff in both states and consumer advocates are not commitments, but they are encouraging in regard to the new construct.”
Bassham said: “We plan to make the required state regulatory filings in August. We’ve been actively engaged with stakeholders for some time now. The dialogue has been very constructive. We remain confident in our ability to secure approvals in a timely manner and in closing the transaction in the first half of next year.”
As noted in the companies’ statement, the transaction is subject to the satisfaction of customary closing conditions, including approval by GPE’s shareholders and Westar’s shareholders and the receipt of regulatory approvals, including FERC, the Missouri Public Service Commission, KCC, and the U.S. Nuclear Regulatory Commission, as well as under the Hart-Scott-Rodino Act.
The companies further noted that Goldman Sachs & Co. LLC is serving as lead financial advisor to GPE; Barclays and Lazard are also serving as financial advisors to GPE; and Bracewell LLP is serving as legal advisor to GPE. Guggenheim Securities, LLC is serving as exclusive financial advisor, and Baker Botts L.L.P., is serving as legal advisor to Westar Energy, the companies said.