Did Aqua America court a power company?
Ever so rarely, a company known for quiet growth in a sleepy business takes a secret, daring, unsettling step to try to reinvent itself as something bigger and bolder.
Ever so rarely, a company known for quiet growth in a sleepy business takes a secret, daring, unsettling step to try to reinvent itself as something bigger and bolder.
Aqua America, the for-profit Bryn Mawr-based water company formerly known as Philadelphia Suburban, has grown for years by purchasing modest-sized town water and wastewater systems, boosting consumers' water rates, updating equipment, and enriching investors with dividends in states that encourage public-utility private enterprise.
Documents filed by ITC Holdings, a Michigan-based electric-power transmission company, suggest that Aqua made a bold, potentially transformative $11 billion offer for ITC earlier this year.
That would be a big step. Not only is it in a different industry, but ITC, with sales of about $1 billion a year, also is 20 percent larger than Aqua.
"For Aqua to make such a major acquisition in electric transmission would be surprising on a number of levels," says veteran utilities analyst Ryan Connors, of Boenning & Scattergood in West Conshohocken, whose report earlier this year urging investors to buy Aqua shares was based on the expectation that it would step up its current business of buying local water utilities.
"Investors place a premium valuation on the stable, high-visibility earnings profile of the water utility business," Connors told me. "This kind of transaction would likely be detrimental," driving down Aqua's share price relative to its profits.
"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.
The question of Aqua's governance was raised earlier this month by director Michael L. Browne, who resigned and sent a letter the company was obliged to make public, in which he blamed the lack of "any truly independent voice" among his fellow Aqua board members. Browne hasn't explained just what Aqua directors especially need to be independent about, or whether it involved any scheme to change the company's focus. The company defended its governance practices, and wished Browne well.
"We won't comment on any potential acquisition," Aqua spokeswoman Donna Alston told me.
ITC didn't end up selling to Aqua. Instead, it 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 enlargement plan:
According to Fortis' account of its successful ITC bid, "On January 16, 2016, a director of ITC affiliated with [an unnamed] U.S. publicly traded company" said his company "might be interested in exploring a potential merger" for about $45 a share.
The only two directors of ITC who are "affiliated" with public companies, according to ITC's list, are Aqua CEO Christopher Franklin and consultant Lee Stewart, who also serves on the board of a much smaller New Jersey plastics manufacturer.
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 independently tried to buy ITC before Fortis sealed the deal. Fleishman declined to discuss his findings.
According to Fortis, the deal-making director turned his company's bid over to Wall Street investment bankers, who jawed the offer a couple of dollars lower.
But after checking with its advisers, ITC decided the deal "would likely result in substantial degradation in value for ITC shareholders," since the would-be buyer's shares traded at a fatter premium than ITC's own. Its board ratified Fortis' competing offer instead.
So the bid ended the way out-of-the-box corporate offers often do - with no deal.
But it also left 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 other big departure from the familiar game plan is Aqua contemplating under newly promoted CEO Franklin and his longtime mentor, Aqua chairman Nicholas DeBenedictis?
Spokeswoman Alston referred me to Franklin's presentation to investors earlier this year. He told shareholders that Aqua is still looking to buy municipal water utilities - but is also open to vague-sounding concepts like "strategic M&A" and "opportunistic growth" - plus enter "market-based" businesses that would help Aqua profitably invest capital and extend its regulatory and operating expertise to unnamed businesses.
Would that include buying a power company bigger than itself? And why stop there?
The company wasn't ready to say more last week.
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@PhillyJoeD