Third Time's a Charm for Scana and Dominion?

We are reaffirming our $56 fair value estimate for  SCANA  and our $84 fair value estimate for Dominion Energy (D) after the companies presented a third merger deal this past weekend that appears to have won support from key opponents. We are reaffirming our narrow moat and stable moat trend ratings for Scana and our wide moat and stable moat trend ratings for Dominion.

Our fair value estimates continue to reflect a 75% probability that the merger will receive regulatory approval and close in early 2019 at Dominion’s proposed 0.669 share exchange ratio. If the merger closes, Scana shareholders’ annualized dividend would quadruple and they would become owners of a company we think has a better long-term competitive advantage with similar valuation upside.

We think the market also is warming to the deal. Scana’s 28% rally since its low in late October has closed the merger arbitrage spread from 35% to 6% as of market close Nov. 26.

This latest offer, presented as a settlement to a lawsuit challenging the South Carolina Base Load Review Act, would require Dominion to reach further into its pockets to pay Scana customers. Dominion now will return $2 billion to ratepayers through an 80% cut in the average customer charge for Scana’s abandoned new nuclear project, among other customer-friendly commitments. This is in line with temporary rate cuts that state lawmakers passed this summer.

Dominion’s initial offer in January contemplated a $1.3 billion cash payment and a 37% nuclear rate reduction. Although the latest plan raises the cost of the deal for Dominion shareholders, the incremental cost is not enough to change our fair value estimate.

The settlement still requires court and state regulatory approval. The South Carolina Public Service Commission is conducting hearings to assess the merger and customer rates. State law obligates regulators to issue a decision by Dec. 21.

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