What will the sale of UniSource and Tucson Electric Power to private Wall Street suitors mean to the community?: The utility buyout
Mar 16 - Arizona Daily Star
With a shareholder vote just three weeks away, debate about the proposed sale of UniSource Energy Corp. centers on what the deal means to the community.
"Their goal is the bottom line, and while that's true of any business, a
public utility is a little different," the retired banker said. "I
look on TEP or any public utility as a community asset."
But UniSource and its Wall Street suitors say TEP ratepayers will see no
changes in management, operations, rates, service or community commitment if the
deal goes through. UniSource would keep its name and its headquarters in Tucson,
where TEP has served customers for more than 100 years.
"To the customer and the community, there should be very little
change," said Steve Lynn, UniSource vice president. An infusion of cash,
Lynn said, will make TEP financially stronger.
Despite those assurances, stakeholders have several concerns:
Consumer advocates fear the highly leveraged deal will saddle UniSource with
too much debt and the new owners might seek to break up the company or cut vital
services.
Regulators are concerned about long-term investment in utility systems and
possible cost cutting.
Some shareholders, to vote on the plan March 29, are reluctant to part with
stock that in some cases they have held since TEP flirted with bankruptcy in the
late 1980s.
Big money on the table
The stakes are high, both in human and financial terms.
TEP serves more than 360,000 local customers. UniSource Energy Services,
created last year after UniSource acquired the Arizona electric and gas systems
of Citizens Communications, serves about 200,000 customers in rural Northern and
Southern Arizona. UniSource and its subsidiaries employ about 1,850 Arizonans.
The buyout is worth nearly$3 billion, including $557 million in cash and $660
million in new debt. The sale price of $25.25 per share represents a 30 percent
premium on the company's closing share price of $19.40 on Nov. 21, the last
close before the deal was announced.
TEP would get a cash infusion of $260 million under the offer, enabling it to
retire up to $300 million of its $1.5 billion in debt and reduce its future
borrowing needs, UniSource says.
Once the sale is final, KKR would own about 62 percent of UniSource. JPMorgan
Partners would have about 31 percent, and Wachovia Capital would get 6 percent.
Sage Mountain LLC, a new Arizona firm, would own the remaining 1 percent and act
as general partner of Saguaro Utility Group, the limited partnership that would
hold the combined investment.
The investors firmly back current management and have no intention of
changing the company's operations, KKR Member Marc Lipschultz said.
"Our plan is to back management doing what they do well,"
Lipschultz said, citing plans to keep management and headquarters in Tucson.
"We don't get involved in the business operations."
Customers fear the worst
A common theme among those who oppose the deal is the negative image of KKR's
1989 buyout of RJR Nabisco, portrayed in the best- selling 1990 book,
"Barbarians at the Gate: The Fall of RJR Nabisco."
The new owners could cut corners by outsourcing jobs and cutting service,
then sell off the company in a few years, said ratepayer Martin, 75.
"The company will be run more like a corporation than a public utility,
with service to the consumer not high on their priority list," he said.
Because UniSource is bound to its current rates and practices by agreements
with the Arizona Corporation Commission, there should be little impact on
consumers - at least initially, said Al Sterman, vice president of the Arizona
Consumers Council.
Still, Sterman worries about possible cost-cutting efforts and the prospect
of a rate increase after TEP's current rate freeze expires in 2008.
"They can do a lot of damage in terms of what consumers are interested
in, if the commission doesn't hold their feet to the fire," Sterman said.
"They're interested in getting the rates they need, then selling it for
five or six bucks more a share," he said. "I don't think their
interest is a public interest."
The Residential Utility Consumer Office,, the state's utility watchdog
agency, wants to see the company kept whole and on solid financial footing, said
Stephen Ahearn, director of the agency known as RUCO.
"KKR brings a certain amount of baggage to the table, and we need to vet
this agreement carefully," Ahearn said. "They used to just buy and
break up companies, like everyone else, in the '80s."
But officials of KKR say they have no interest in breaking up UniSource or
TEP.
KKR's Lipschultz called the assumption that the KKR group would attempt to
increase rates quickly to boost profits "categorically incorrect."
KKR represents many state and private pension funds and holds its investments
for an average of more than seven years, Lipschultz said. The company has
invested about $114 billion in 110 deals since its founding in 1976, and its
recent utility ventures include a 2003 buyout of the power transmission business
of Detroit Edison.
And the company is committed to staying involved in Tucson, Lipschultz said.
The acquisition agreement calls for UniSource's charitable and community support
to stay at least at current levels - about $750,000 last year, Lynn said.
A white knight?
If anything, the deal will protect UniSource, Lipschultz said.
Because of its status as a "small-cap" utility - with total stock
value of less than $500 million - UniSource was undervalued by the public equity
markets. That made it ripe for a takeover, he said.
"Now, they won't have to worry about another big public utility coming
in and buying them out," he said.
Ownership by long-term private investors will remove the pressure for
short-term profits public shareholders expect, Lipschultz added.
KKR Member Scott Stuart, who has been with the company for 18 years, says the
negative image of KKR is unfair, fueled by an inaccurate portrayal in
"Barbarians at the Gate."
RJR Nabisco's board invited KKR to bid after executives tried to buy the
company at a low price, Stuart said. KKR has never engaged in a hostile
takeover, and is often enlisted by company management to fend off unfriendly
bids as a "white knight," Stuart said.
But at least one energy industry expert thinks there's a good chance the KKR-led
investment group will turn around and sell UniSource within a few years - either
alone or along with future energy acquisitions.
To boost profit, the new owners either must raise revenues or cut costs - a
difficult task since significant cost-cutting would likely meet resistance from
state regulators concerned about service and reliability, said Mark T. Williams,
a professor of finance and economics at Boston University.
"The problem KKR is facing in this deal is, there isn't too much fat to
cut out," he said.
Instead, Williams believes KKR will either quickly sell, or "flip,"
UniSource or acquire other energy companies and string them together with
UniSource to create a multi-region utility conglomerate it could later sell at a
premium.
The expected repeal this year of the federal Public Utility Holding Company
Act, which restricts the purchase of utility assets across state lines, would
give utilities a whole new group of potential buyers, he said.
Dissecting the deal
State regulators vow to put KKR's promises under the microscope, starting
with hearings before a Corporation Commission administrative law judge.
"Any transaction would have to be tested against what's in the interest
of ratepayers," said Commission Chairman Marc Spitzer.
Spitzer declined to comment in detail, since the case is docketed for
hearings. Generally, the former tax lawyer and state legislator said, state
rules already protect ratepayers by insulating regulated utilities from
liabilities of parent companies.
Before the proposal reaches regulators, UniSource shareholders will vote on
the deal.
Longtime shareholder Bob Broder of Tucson, who saw his TEP stock lose most of
its value in the early 1990s after a 1-for-5 reverse stock split, hopes the deal
is rejected.
"I believe in investing in local stocks and local companies," he
said. "All these years, the stock does nothing, and now this group comes in
and cherry-picks it."
Two shareholders have filed identical lawsuits against UniSource, alleging
the deal would harm shareholders. The suits are on hold pending the
shareholders' vote.
Analysts and other investors say the offer is a good deal.
"As a shareholder, I pretty much have to be in favor or it, with a 30
percent premium, because I don't see a premium like that coming any other
way," said Bill Meek of Phoenix, longtime president of the Arizona Utility
Investors Association.
Rejection of the buyout by shareholders or regulators would be costly for
UniSource.
The deal is subject to a "breakup fee" of up to $25 million, to be
paid to the KKR group if the deal falls through for certain reasons, including
adverse regulatory decisions.
The impact
Kohlberg Kravis Roberts & Co.'s bid to purchase UniSource and its
subsidiary Tucson Electric Power Co. impacts many people locally.
$3 billion
The value of the proposed UniSource buyout
2,500
UniSource shareholders in Arizona
1,850
UniSource employees in Arizona
$25.25
Cash offered for each Unisource share
What's next
The vote
UniSource Energy Corp shareholders vote on the $3 billion buyout at 10 a.m.
March 29 at Westin La Paloma Resort & Spa, 3800 E. Sunrise Drive.
Shareholders also may vote via phone, mail or the Internet (voting
instructions were sent to shareholders with proxy materials).
Shareholders at the close of business Feb. 23 are eligible to vote on the
deal, which would give them $25.25 in cash for each UniSource share of common
stock.
Each share gets one vote, and a failure to vote counts as a vote against the
deal.
For more information or to get proxy materials, visit UniSource's Web site at
www.unisourceenergy.com, visit the company's offices at 1 S. Church Ave., or
call 571-4000. For proxy questions, shareholders also may call the company's
proxy solicitor, D.F. King & Co., at 800-549-6746.
If it fails
UniSource will continue to operate as before and management will consider
other alternatives. The company may be liable for up to $25 million in
"breakup fees," payable to the acquiring entity Saguaro Acquisition
Corp.
If it's approved
UniSource and the acquiring investment group will seek required regulatory
approvals from the Arizona Corporation Commission, the U.S. Securities and
Exchange Commission and the Federal Energy Regulatory Commission.
Hearings on the buyout before an administrative law judge of the Arizona
Corporation Commission begin in Tucson June 21. Afterward, the judge will send a
recommendation to the full, five-member commission.
Hearings before the full Corporation Commission are expected to be scheduled
in late summer.
Provided all regulatory approvals are received, UniSource management expects
to complete the acquisition in the second half of this year. UniSource's stock
would be de-listed from the New York Stock Exchange.
Shareholders will be sent instructions on how to cash in their UniSource
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