Update: Aqua's aborted power deal 'surprising', 'detrimental'

New CEO Christopher Franklin told investors earlier this year that Aqua is still looking to buy municipal water utilities.

MONDAY Updates, reactions to Aqua America's interest in possibly acquiring a company larger than itself: "For Aqua to make such a major acquisition in electric transmission would be surprising on a number of levels," veteran utilities analyst Ryan Connors, of Boenning & Scattergood in West Conshohocken, told me.

"Investors place a premium valuation on the stable, high visibility earnings profile of the water utility business, and this kind of transaction would likely be detrimental to Aqua's P/E multiple," Connors added.

"The mere perception that Aqua would do such a deal shows that corporate governance has run amok," said Robert Costello, boss at Costello Asset Management, Huntingdon Valley, and a longtime observer of Aqua and other Philadelphia-area companies.

FRIDAY: Public documents suggest that Aqua America, a Bryn Mawr-based for-profit utility owner best known for its incremental acquisitions of local water and sewer utilities, make a bold, potentially transformative, $11 billion+ bid for ITC Holdings, a Michigan-based electric-power transmission company earlier this year. (ITC revenues total around $1 billion a year, 20% larger than Aqua's.)

"We won't comment on any potential acquisition," Aqua spokeswoman Donna Alston told me. New CEO Christopher Franklin told investors earlier this year that Aqua is still looking to buy municipal water utilities -- and added that the company is also open to "Strategic M&A" and "Opportunistic Growth," and to "market-based" businesses that would help Aqua profitably invest capital and apply its regulatory and operating expertise beyond water supply.

ITC didn't go with Aqua; instead it has agreed to be acquired by Canada-based Fortis Inc. for $11.3 billion, or $44.90 a share.

Here's what points to a failed Aqua bid:

According to Fortis's F-4 merger statement (see P. 59),  "on January 16, 2016, a director of ITC affiliated with Party G, a U.S. publicly-traded company, informed (ITC) that Party G might be interested in exploring a potential merger of Party G and ITC" at a price of around $45 a share.

So who's Party G? The only two directors of ITC currently "affiliated" with public companies, according to ITC's list, are Aqua CEO Christopher Franklin, and Lee Stewart, who also serves on the board of a publicly-traded New Jersey plastics maker called AEP Inc.

An ITC deal would be a big step for Aqua, whose stock market value is around $6.4 billion, less than the offer value; as a water utility, Aqua trades at a fat premium to ITC's recent share price, giving it more muscle to buy with.

(ITC would be a much larger leap for AEP, a North Jersey-based plastic-films-maker whose market value is only about 5% of Aqua's and which trades at a price/earnings discount to the utilities. Not to be confused with American Electric Power Co. Inc., a much larger AEP that on paper would seem a more likely ITC acquirer but has no obvious ITC "affiiation.")

In a report to clients, Steven Fleishman, analyst at Wolfe Research, New York, identified Aqua and Warren Buffett's Berkshire Hathaway as companies that had tried to buy ITC before Fortis sealed the deal, according to a person who showed me excerpts of Fleishman's research. Fleishman and his firm declined to provide a copy of his report or to confirm details. (Fleishman's name corrected)

According to the ITC filing, the board member "verbally expressed an interest in a stock-for-stock transaction with a preliminary valuation of ITC at approximately US $45 per share" in January, and turned the deal over to investment bank Lazard Freres & Co. In February the two sides discussed bids in the $39 to $43.25 range.

But after reviewing the offer with its advisers, ITC decided the offer "would likely result in substantial degradation in value for ITC shareholders if the two companies were combined," given would-be acquirer Aqua's higher-premium share price vs. ITC's.

The seller's advisers also saw "a substantial risk that Fortis would abandon its pursuit of ITC, or adversely change the terms of its proposal, were ITC to delay the process" by spending a lot of time trying to make an Aqua deal work.

That ended the challenge to Fortis' offer; but leaves open the question noted by analyst Connors and investment manager Costello: if Aqua were ready to buy a power-transmission company larger than itself, what are Aqua's ambitious long-term plans under Franklin and his longtime mentor, Aqua chairman Nicholas DeBenedictis? 

There's a sign of recent unrest on the Aqua board: as I reported here, director Michael L. Browne resigned last week, citing the lack of "any truly independent voice" among his fellow Aqua board members, but not detailing exactly what he's worried about.