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Documents reveal corporate suitors’ wooing of Avista Corp., ultimate sale to Hydro One

UPDATED: Mon., Sept. 18, 2017

 (Tyler Tjomsland / The Spokesman-Review)
(Tyler Tjomsland / The Spokesman-Review)

Earlier this year, Avista Corp. had nearly as many dates as Rachel Lindsay on ABC’s “Bachelorette.”

As spring ripened into summer, the Spokane-based utility entertained merger and purchase proposals from five prospective suitors. Avista CEO Scott Morris exchanged emails with other chief executives, which progressed to phone calls and eventually to in-person meetings to discuss a potential sale of the company.

The corporate courtship led to a July 19 announcement: The 128-year-old Spokane utility would be purchased by Hydro One, of Toronto, in a $5.3 billion cash deal, expected to close next year.

After the sale was announced, Morris declined to answer questions about which company initiated talks, saying more information would be available later.

Some of the behind-the-scenes maneuvering is outlined in Avista’s proxy statement to shareholders, filed this week with the U.S. Securities and Exchange Commission.

The sale is a big deal for Spokane, where Avista – formerly Washington Water Power – was founded in 1889 when Washington was still a territory. The company’s headquarters are here, and Avista has a large civic presence.

Avista comes off as a cool but shrewd operator in a 12-page description of how the proposed sale came about. Executives repeatedly said the company wasn’t on the market, but they were willing to entertain offers. After one prospective buyer got cold feet, Hydro One stepped forward with its offer.

Merger proposals are fairly routine among utilities, according to Mark Thies, Avista’s senior vice president and chief financial officer. As one of the smaller publicly traded utilities left in a consolidating industry, Avista has been a frequent target of inquiries, he said in a Friday interview.

“Avista has been on people’s radar,” Thies said. “We’ve just said in the past, ‘We have a good strategy. We think what we’re doing makes a lot of sense. We’re not for sale.’ ”

But amid another round of industry consolidations, Avista’s board of directors and its executives decided it was time to explore the idea again. A November meeting was set up with Avista’s investment banker, Bank of America Merrill Lynch. Executives wanted a briefing on utility industry developments, including recent mergers and acquisitions.

By late January, Avista was entertaining multiple offers for a prospective sale or merger. Four companies – described only as parties A, B, C and D in the documents – had made overtures to Avista. Phone calls and meetings were arranged. Information was exchanged.

By February, Avista executives were warming to the idea of an alliance with Party A. The day after Valentine’s Day, Avista’s Morris and Thies met for dinner in Spokane with executives from the other company.

The next day, Party A’s chief executive made a verbal offer to buy Avista for $52 to $55 per share, a premium over its trading price. A draft merger agreement was drawn up. But within a few weeks, the deal soured.

Party A had second thoughts about Avista’s purchase price, and the company didn’t have its financing lined up. By early March, the deal was off.

Meanwhile, Hydro One’s CEO Mayo Schmidt had emailed Morris about setting up a meeting. When the two men met in Spokane in late March, Schmidt suggested a purchase price similar to Party A’s offer: $52 to $53 per share.

Hydro One buys electricity and delivers the power on company-owned transmission and distribution lines to its 1.3 million customers in rural and suburban Ontario.

Canadian power companies have been buying American utilities for several years, expanding their reach into the U.S., which offers lighter regulations and potentially higher returns.

As their interest in crafting a deal deepened, Avista and Hydro One executives scheduled a series of meetings and dinners in Spokane and Toronto to get better acquainted.

In late June, Morris, Thies and Hydro One’s Schmidt met at an airport conference room in Great Falls, Montana, where Schmidt – a dual U.S.-Canadian citizen – owns a ranch. Schmidt confirmed the earlier offering price of $52 to $53 per share for Avista’s stock. Within a week, a draft merger agreement was drawn up.

For about three weeks, the companies and their representatives haggled over the sale terms. On July 19, Avista and Hydro One’s board of directors voted to support the purchase agreement of $53 per share. News of the pending sale was announced to the public that afternoon.

“It preserves our identity and helps us continue to chart our own course in a rapidly consolidating utility industry,” Morris said during a news conference following the announcement.

“We felt we found the right partner,” Thies said Friday. “We think there are benefits for our customers, the communities we serve, our employees and our shareholders.”

The sale of Avista is subject to approval by each company’s shareholders and state and federal regulators. Avista expects to hold a Nov. 21 meeting for shareholders to vote on the sale, but the date must still be approved by the Securities and Exchange Commission.

The sale is expected to close in the second half of 2018.

Either company can back out of the deal, but there’s a steep price.

If Avista dumps Hydro One and accepts a “superior offer,” it must pay Hydro One $103 million to terminate the sale.

Hydro One is on the hook for the same amount if it jilts Avista.

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