Aqua America/Peoples deal years in making, sources say

Provided by Mergermarket

Aqua America’s [NYSE:WTR] talks with Peoples Natural Gas about a deal picked up pace in the last three months, said three sources familiar with the situation.

These sources said Aqua America and Peoples have been “aware” of each other being in the same state and have held some talks in the past couple of years, but nothing serious came of the discussions until recently.

On Tuesday, Bryn Mawr, Philadelphia-based water utility company Aqua America announced plans to acquire the Pittsburgh-based gas local distribution company (LDC) Peoples, which is backed by SteelRiver Infrastructure Partners. The all-cash deal values Peoples at USD 4.3bn on an enterprise value basis.

A sector advisor and two of the sources familiar said that it was known that SteelRiver Infrastructure Partners would look to monetize Peoples as the financial sponsor has owned the company for eight years and has generated good returns on its investment.

SteelRiver had quietly put out a word in the industry that it would be a willing seller at an appropriate valuation, and, therefore, Peoples was “always in the market,” said one of the sources and the sector advisor.

The seller conducted a “small” process that comprised talks with other interested suitors, another of the sources said. This source and the first source familiar said Aqua America was the most natural and best buyer of Peoples given its track record as a water utility operator with good relationships with state regulators.

Aqua America CEO Chris Franklin told investors that “for some time Aqua had been looking for the right strategic acquisition with the right management team, and at the right price,” with all these factors coming together for Peoples, the fifth largest gas LDC business in the US.

The deal marks one of the first big mergers of gas and water utilities. Aqua America is the country’s second-largest water utility.

From Aqua America’s standpoint, the Peoples acquisition helps it expand within its existing territory and is a good diversification play by buying gas LDC businesses, the sources said.

The same sources said that Aqua America had indicated to the market that they were looking for assets for growth. The Peoples’ deal supported the company’s core competency in Pennsylvania.

Aqua America shares initially declined 10% on Tuesday to close to USD 34 per share, but have since gained to close Wednesday at USD 35.29 per share.

Peoples owns Peoples Natural Gas Company, Peoples Gas Company and Delta Natural Gas Company. The combined firm will operate utilities in 10 states with the majority of its net income coming from water, according to Aqua America.

The transaction is subject to regulatory approvals by the public utility commissions of Pennsylvania, Kentucky and West Virginia. The deal is expected to close in mid-2019.

Two of the sources familiar said the deal carries low regulatory risk, with one of them noting that the parties’ anticipation is that the regulatory review could be “silky smooth.”

To fund the deal, Aqua says it plans to raise USD 2.2bn to USD 2.5bn in equity and add USD 500m to USD 800m in debt. It will also assume USD 1.3bn in Peoples’ debt.

Moelis & Company is serving as the lead financial advisor to Aqua. Goldman Sachs and RBC Capital Markets are also serving as financial advisors to Aqua, and are providing the fully committed bridge facility. Simpson Thacher & Bartlett LLP is serving as legal advisor to Aqua. The seller is being advised by Morgan Stanley and Winston & Strawn LLP as financial and legal advisors respectively.

Aqua and Peoples did not return requests for comment.

by Bhavna Kaul 


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