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Utilities: Who Are the Next M&A Targets?

Travis Miller

Travis Miller: Recently, Duke Energy (DUK) became the latest regulated utility in the U.S. to add natural gas distribution at what we think is an extraordinarily high price. Their proposal for Piedmont Natural Gas (PIED) comes at a 31 times multiple to our earnings forecast and almost $7 billion for a relatively small utility in North Carolina.

This is the third time in the last couple of months where we've seen very high prices paid for natural gas distributions. In August, Southern Company (SO) paid almost $12 billion for AGL Resources (GAS); in September, Emera (EMRAF), a Canadian utility, paid almost $10 billion for Teco Energy (TE), mostly a natural-gas-distribution and electric-distribution company. And we think there are three more natural-gas-distribution pure-play utilities that could be next in line.

The largest of those--and the most likely--is Atmos Energy (ATO). This is one of the largest natural-gas-distribution utilities in the U.S. It serves eight states. Right now, we think it's about 20% overvalued; but at the prices we've seen utilities pay right now, that could be cheap. The other two are WGL Holdings (WGL) and New Jersey Resources (NJR), both are smaller natural-gas-distribution utilities, and we think both are overvalued right now. But the prices that utilities have been willing to pay have been exorbitantly high.