Fortis Inc. (TSE: FTS) agreed to buy ITC Holdings Corp. (NYSE: ITC) for $6.9 billion in cash and stock, adding its high regulated returns in what will be the largest Canadian takeover of a U.S. utility.
Fortis, a power and natural gas distributor and Canada’s largest utility owner, will pay the equivalent of $44.90 for each ITC share, according to a statement Tuesday. That’s a 14 percent premium to Monday’s close, and a 33 percent premium to the close on Nov. 27, before Bloomberg reported that ITC was exploring a sale. The offer, which totals $11.3 billion including assumed debt, will comprise $22.57 in cash and 0.752 Fortis shares.
The sale comes as power companies, grappling with flat electricity demand and rising capital costs, seek deals in other areas promising better growth. ITC’s transmission lines earned the highest adjusted return on equity of any U.S. electric network utility holdings company.
"Fortis has grown its business through strategic acquisitions,” Chief Executive Officer Barry Perry said in the statement. “The acquisition of ITC – a premier pure-play transmission utility – is a continuation of this growth strategy.”
Fortis, based in St. John’s, Newfoundland, bought Arizona utility owner UNS Energy Corp. for $2.5 billion in cash in 2014 and New York utility owner CH Energy Group Inc. for about $968.5 million in 2013. With ITC, Fortis expects to capitalize on construction of new high-voltage lines as the administration of President Barack Obama encourages development of wind farms and other sources of renewable energy.
In other recent deals, Southern Co. is buying gas distributor AGL Resources Inc. for about $8 billion in cash and Duke Energy Corp. is buying Piedmont Natural Gas Co. for about $4.9 billion. Halifax, Nova Scotia-based Emera Inc.’s purchase of Teco Energy Inc. for about $6.5 billion is pending.
ITC earned an adjusted return on equity of more than 17 percent in 2014, above the 11 percent average of its peers including Consolidated Edison Inc. and Sempra Energy, data compiled by Bloomberg show. It’s the only publicly traded U.S. company that owns only transmission lines.
Fortis intends to sell $2 billion of debt and as much as 19.9 percent of Novi, Michigan-based ITC to other investors to finance the cash portion of the deal, according to the statement. The sale is expected to close in late 2016 subject to shareholder and regulatory approvals.
The announcement was made before the start of regular trading on North American markets. Fortis fell 2.1 percent in pre-market trading to C$40.50 in Toronto. ITC rose 4.3 percent to $41.06 in New York.
Goldman Sachs Group Inc. and Bank of Nova Scotia advised Fortis and provided financing. White & Case LLP and Davies Ward Phillips & Vineberg LLP were legal advisers. Barclays Plc and Morgan Stanley advised ITC. Legal advisers were Simpson Thacher & Bartlett LLP. ITC’s board was advised by Lazard Ltd. and Jones Day.
Fortis intends to seek listing of its common stock on the New York Stock Exchange in connection with the acquisition. ITC will continue as a stand-alone transmission company and its shareholders will own about 27 percent of Fortis, according to the statement. Fortis plans to retain all of ITC’s employees and maintain corporate headquarters in Novi.
Federal regulators set ITC’s profit on investments, typically allowing a higher return than states overseeing power suppliers do, according to Bloomberg Intelligence analyst Stacy Nemeroff. While the Federal Energy Regulatory Commission is considering cutting transmission-line rates for some customers, ITC’s returns will probably remain above average, Nemeroff said by e-mail Jan. 26.
ITC owns and operates 15,600 miles (25,100 kilometers) of high-voltage lines in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma. The lines can deliver more than 26,000 megawatts, according to its website. That’s enough power for 20.8 million average U.S. homes, according to its website. The company plans to invest about $3 billion in new lines and improvements through 2018, according to a November investor presentation.