Headwinds for Puget Energy deal; analyst takes Bell Canada LBO financing banks at their word

By Paul A. Harris

St. Louis, June 27 - Puget Energy Inc. shares (NYSE: PSD) slightly underperformed the broad market on Friday, closing 1.05% lower, or $0.26, at $24.50 per share, as analysts assessed recent headwinds - regulatory and otherwise - that have beset the $30 per share bid for the utility by a consortium of investors led by Australia's Macquarie Infrastructure Partners.

On Friday a special situations analyst noted that the Seattle Post-Intelligencer has reported that three Washington counties are seeking to take over Puget Energy's local operations, and run them as locally owned and operated utilities.

Jefferson County, on the Olympic Peninsula, with 17,400 electricity customers and Island County, in Puget Sound, representing 34,400 customers, are attempting to "municipalize" Puget Energy's operations.

Meanwhile in northwestern Washington's Skagit County a public utility district is studying the merits of attempting to take over Puget Energy's local electric operations.

Residents are gathering petitions to place these issues on the November ballot.

When Prospect News asked two stock analysts on Friday how these initiatives might impact the proposed Macquarie bid, both said that it was too early to tell.

However one of them, who declined to go on the record, said that the moves undoubtedly would have an impact on the deal.

Regulatory headwinds

Both sources also mentioned a recent finding by the Public Counsel of the Washington State Attorney General's Office recommending that the state Utilities and Transportation Commission not approve the $7.4 billion acquisition, as proposed, because it is not in the public interest.

"Based upon our review, this sale, as proposed, simply exposes PSE's customers to an undue level of financial risk by undertaking too much debt," Public Counsel chief Simon Ffitch stated in a press release.

"At the same time, customers have no assurance that capital for infrastructure will be any more available or affordable than without the merger. Consumers appear to get little or nothing in return for the increased financial risk."

In particular the Public Counsel cited the addition of $1.6 billion of new bank debt to PSE's $2.6 billion of existing debt as part of the initial transaction, and added that bond rating agencies have recognized that the proposed debt represents a significant departure from Puget's current financial strategy.

"The bond rating has been negatively impacted, an indicator of potential harm from the proposed transaction," the release stated.

Also the transaction does not balance the interests of shareholders and ratepayers, the counsel added.

Meanwhile commission staff members have also testified publicly against the transaction, one analyst noted.

Bell Canada, as expected

Now that the Supreme Court of Canada has cleared the way for the C$52 billion sale of Bell Canada parent BCE Inc., a special situations equities analyst expects that C$42.75 per share bid in the record-setting LBO will hold up, even though analysts have speculated in the financial press that the banks committed to financing the deal are attempting to "Clear Channel it," that is, attempting to wrest concessions similar to the ones which ultimately reduced the per share price for the Clear Channel Communications LBO to $36 from $39.20.

"The banks have stated that they are committed to the financing as it exists, and I take them at their word," the analyst said, adding that there could indeed be some alterations to the structure of the BCE deal's debt financing.

The analyst also took note of a posting by Wellington Financial on the Seeking Alpha blog suggesting that BCE skip its C$0.365 dividend and keep the cash, C$294 million, in the company's coffers as a gesture to the lending banks. On June 5, BCE announced that it was deferring a decision on whether to declare a dividend for the second quarter and said it expected to make an announcement in late June.

Wellington's Mark McQueen wrote "As far as I'm concerned, retaining this dividend and the next is an easy decision - despite the fact that it essentially reduces the takeover price to C$42.00 should the deal close after September 14 (which would have been the record date for the third quarter dividend payment).

"We shareholders would still prefer that choice to a one-way ticket back to C$28."

Wellington, which has a position in BCE, subsequently posted on the blog a suggestion that existing shareholders adopt the dual role of lender in the deal, and accept C$41 in cash per share, as well as one deeply subordinated note per share, valued at $1.75, decreasing the burden of the debt financing for the lending banks.

On Friday BCE (NYSE: BCE) shares dropped 0.66% to $36.38, down $0.24 on the day.

Not so fast!

In a closely followed Trans-Atlantic beer battle, Anheuser-Busch Cos., Inc. said during a Friday conference call that it will challenge an assertion made by Inbev BV, on Thursday in Delaware Chancery Court that Anheuser-Busch shareholders may remove without cause all 13 members of the St. Louis-based brewer's present board of directors.

It followed the board's Thursday rejection of Inbev's $65 per share, $47 billion bid for the famous St. Louis-based brewer of Budweiser and Busch Bavarian Beer.

Also during the Friday call Anheuser-Busch announced a plan to reduce costs and improve efficiency with a new early retirement program to be offered to salaried employees in the third quarter this year, with a target of reducing the salaried workforce by 10% to 15% through this program and attrition.

Shares of Anheuser-Busch resoundingly outperformed the market on Friday, rallying 1.48% to close at $62.26, up $0.91 on the day.

Meanwhile InBev's (EBR: INB) shares fell 1.91%, down €0.86 to close at €44.14.

Friday's situations unfolded against a backdrop of continued weakness in the major U.S. stock indexes.

The Dow Jones Industrial Average dropped 106.91 points, 0.93%, to close at 11,346.51.

The S&P 500 fell 0.37%, losing 4.77 points to close at 1,278.38.

The Nasdaq gave up 0.25% to close at 2,315.63, down 5.74 on the day.

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