Water/electric deal not radical after all, analyst says (Update)

(Small investor Gerald Fazi's comments aded after analyst Connors): Disclosure of Bryn Mawr multistate water and sewer utility operator Aqua America's failed bid for Midwestern power-transmission company ITC surprised Aqua investors earlier this month. But utility analyst Ryan Connors, whose first response was to question management's direction, now says he's warming to the idea.

"Would a water/electric utility deal really be so outlandish?" Connors writes in a report to clients of Boenning & Scattergood, the West Conshohocken investment bank.

"Initial investor reaction reaction to the idea ranged from surprise to bemusement," but -- even though Aqua's not talking -- on investigation Connors says he's "gained an appreciation for the rationale of the transaction," suggesting Aqua CEO Christopher Franklin might eventually be seen as a pioneer "for a wave of cross-sector utility M&A in the years ahead."

Water and electric "actually do have considerable synergies," Connors went on. Both need expertise in handling regulators and governments, both tend to grow "incrementally," and "regulators we spoke with like the idea as well," implying there won't be a lot of resistance from state public utility commissions if Aqua tries to buy a power business again. 

UPDATE 4/4: Reader Gerald Fazi still isn't buying the water/power combination: "Aqua has many a retired person's nest egg wrapped up in its stock," Fazi notes. "Why? Because it's a pretty boring stock, yet you can make a buck or two (through dividends and longterm price appreciation)...

"We don't like uncertainty. And that's what you get when you take on mountains of debt and then add a water company management team to run a power company... That's not 'synergy', (that both kinds of utilities) deal with regulators. Synergy is a group of (common factors.) That's a recipe for disaster to the stock price, if you ask me."

Fazi worries more size and diversity might not translate to regulatory clout: "Maybe they gave (the local utilty) a rate increase last time. This time they stick it to the big water/power company...

"Lastly, this reminds me of someone buying an ice company when refrigerators were hitting the market. Very short sighted. I live in a community with over 250 homes. In the last few years many have added solar panels, Aqua itself has added solar panels for many pumping stations...

"I would hope Mr. Franklin would not play loosey-goosey with investors' hard earned savings."