Kohlberg Kravis Roberts & Co., fresh off its MTU purchase, agreed to take UniSource Energy Corp. private in a rouhgly $3 billion deal, leading an investment group that includes JPMorgan Partners and Wachovia Capital Partners. Sourced by JPMorgan, the deal is expected to close in the second half of 2004.
The buying group will pay $25.25 a share for UniSource, representing a 30% premium over the stock’s closing price on Nov. 21, and at the deal’s close KKR will assume a roughly 62% stake in the company, with JPMorgan and Wachovia holding onto 32% and 6% stakes, respectively. The buying group will acquire the public utility through Saguaro Utility Group, L.P., a holding company set up for the investment.
UniSource Energy is a utility company that serves roughly 550,000 customers in Arizona through its UniSource Energy Services and Tucson Electric Power subsidiaries. The company’s stock trades on the New York Stock Exchange under the ticker symbol “UNS.”
“The deal kind of came out of nowhere,” said Maurice E. May, principal of Power Insights, a stock research company that is contracted to provide research to Soleil Securities, a New York City-based brokerage group.
“It is a good investment [for the buying group]. The asking price is not overly generous, and UniSource caters to a market that is growing at a rate of more than twice the national average.”
The business also puts up about $100 million in free-cash flow annually, which likely whet the buying group’s interest, and UniSource’s market has grown at a roughly 2%-to-3% clip in recent years, according to May, representing relatively fast growth compared to the torpid 1% advances seen nationally.
However, the company’s stock has been in a bit of holding period in recent years, as investors have been waiting for UniSource to address some outstanding issues, including certain unregulated investments and an intercompany loan, both of which have been blamed for the company’s depressed earnings. With the deal, though, the investor group will infuse Tucson Electric with up to $260 million of additional capital, and through that will cover the retirement of the $95 million loan. Also, May is expecting the company, in time, to dispose of most of its unregulated investments. “It is already working its way out of two of them, right now,” he said.
Meanwhile, KKR Partner Scott Stuart, said, “Through this investment, UniSource Energy will be able to move more quickly and decisively to pursue its plans to further strengthen its businesses and enhance service and reliability for customers in Arizona.”
The transaction-one of the first public-to-private buyouts of a utility-will actually help de-lever the company, boosting its capital structure from a roughly 22% equity base to up around the 40% level. To finance the transaction, the buying group will put in a roughly $557 million equity stake, and supplement that with $300 million in high-yield bonds and $670 million in bank debt. Credit Suisse First Boston has been tapped to run the bond offering, while J.P. Morgan Chase & Co. will lead the syndicate for the bank debt. The balance of the $3 billion transaction comes from the existing UniSource debt, which will be assumed by the consortium.
Before the deal can close, the transaction needs clearance from UniSource shareholders, the Securities and Exchange Commission, the Arizona Corporation Commission, U.S. antitrust authorities and the Federal Energy Regulatory Commission. May believes that through de-levering the company, that should help UniSource clear the regulatory hurdles. “The company has been pretty highly leveraged…The equity infusion should grease the skids at the Commission,” he said.
Once the acquisition is finalized, UniSource’s senior management team will stay in place, and the company does not anticipate any changes to its operations or personnel.