Avista may seek another ‘white knight’

Avista Corp. remains a likely takeover target, even though the Spokane-based utility’s plan to be purchased by a Canadian company is apparently dead, a financial analyst said Thursday.

Avista probably won’t remain a “standalone company,” Shahriar Pourreza, an analyst for Guggenheim Securities, wrote in a research note. “We could eventually see another white knight and therefore we do not eliminate the possibility that (Avista) could be a potential take-out candidate in the future.”

In business, a white knight refers to a company recruited for a friendly acquisition. Avista revealed last year that it put out feelers and entertained offers from four companies before accepting Toronto-based Hydro One Ltd.’s $5.3 billion cash offer.

Despite its large presence in the Spokane area, Avista is relatively small for a publicly traded utility. It ranks 46th out of 50 publicly traded utilities in the United States.

The Washington Utilities and Transportation Commission shut down the sale on Wednesday by withholding its approval. The three commissioners said the deal was too risky because of the province of Ontario’s interference in Hydro One’s affairs for political reasons. The proposed sale failed the state’s requirement for leaving Avista’s customers’ better off, they said.

Although Avista and Hydro One could appeal the Washington commission’s decision, “we think the bar is too high to overcome,” Pourreza said.

Canadian analyst Jeremy Rosenfield of iA Securities also said an appeal would be unproductive.

“We expect the proposed transaction to quickly unravel,” he wrote in a research note.

A U.S. company probably could “get this deal done,” Pourreza said. The commission’s objections to Hydro One as a merger partner revolved around the province of Ontario’s 47 percent ownership stake in the utility and the province’s ability to influence Hydro One for political gain.

The provincial government acted with “careless disregard” when it removed Hydro One’s board and CEO last summer, costing the utility millions of dollars in lost shareholder value and resulting in downgrades to credit ratings, the Washington commission said. Further government interference could affect Hydro One’s earnings and the utility’s ability to attract talented leadership, according to the commission.

“All of this raises fundamental concerns about Hydro One’s suitability as a merger partner and owner of Avista,” the commission concluded.

The man at the center of finger-pointing over the failed deal remained unrepentant Thursday.

Ontario Premier Doug Ford insisted he was not to blame for Washington regulators’ decision to deny the sale, which could cost Hydro One millions of dollars in termination fees.

Ford said he’s carrying out campaign promises to change the utility’s leadership and bring down electric rates for Hydro One customers.

“While some critics might believe that the concerns of Ontario families, seniors, and businesses should take a back seat to foreign regulators, our government remains unwavering in our commitment to the people of Ontario to reduce hydro rates and provide a reliable energy system,” Ford said in a statement.

Within days of being sworn into office, Ford’s government asked for the resignation of Hydro One’s board of directors and the retirement of CEO Mayo Schmidt.

The July 11 action caused substantial harm to both Avista and Hydro One, the Washington commission wrote in its decision.

Avista’s shares dropped 4.5 percent in price after news of the ouster broke, and Hydro One’s shares dropped 8 percent.

During an October hearing on the proposed sale, Washington commissioners asked executives if the sudden resignations at Hydro One were in the best interest of either company.

Tom Woods, Hydro One’s new board chairman, said no. Scott Morris, Avista’s chairman and CEO, also responded no to the question.

“The value of the province’s own Hydro One shares dropped by hundreds of millions of dollars” after the sudden ouster of Hydro One’s leadership, the three commissioners wrote in their decision.

Hydro One will be required to pay Avista $103 million in termination fees if the sale fails for lack of regulatory approval, according to analysts.

Avista and Hydro One issued a brief joint statement Wednesday afternoon, saying they are considering their options.

Pourreza, the Guggenheim analyst, said he expected Idaho to be the “Achilles heal of the transaction,” because the opposition there has been more vocal and included concerns from the Idaho Public Utilities Commission’s staff. Instead, Washington regulators “seemingly put the nail in the coffin” for the sale, he said.

Financial markets reacted like the deal was dead Thursday, with Avista’s stock prices dropping to premerger-announcement levels.

Avista’s stock immediately fell nearly 14 percent in heavy trading Thursday when the New York Stock Exchange opened. By 6:45 a.m., Avista’s stock price was $43.97, down from $51.50 at end of Tuesday, the last day the markets were open before being closed Wednesday for former President George H.W. Bush’s funeral.

Avista’s stock rallied slightly to close at $44.68 per share Thursday.

In Idaho and Oregon, public utility commissions still have decisions pending on the sale. Pourreza said he expects those applications to be withdrawn by the companies since the sale was rejected in Washington.

For another company looking to buy Avista, having to get approvals from the five states where Avista operates is a risk, Pourreza said.

Hydro One, meanwhile, is unlikely to conduct any mergers or acquisitions outside of Ontario for a while, said Rosenfield, the iA Securities analyst.

“Political overhang,” he said, will drag down the company’s attractiveness.