Ken Silverstein EnergyBiz Insider Editor-in-Chief

One of the chief concerns is whether foreign-controlled interests would adequately invest in the local communities of Montana, Nebraska and South Dakota -- where the utility now serves. Both NorthWestern and Babcock & Brown say that they welcome the scrutiny, which will enable state regulators to see that the Australian company has the wherewithal and the desire to make crucial investments that will create local jobs.

"As part of the evaluation, Northwestern's board instructed Credit Suisse to make contact with a select number of qualified parties that could acquire, finance or support recapitalization of the utility," says Gordon Bava, a lawyer with Manatt, Phelps & Philips that is working on the deal. "Strategic buyers were contacted that include a variety of private equity funds. Babcock and Brown made the superior offer."

Foreign ownership of American utilities is not uncommon. For example, National Grid owns Niagara Mohawk and E.ON owns LG&E Energy Corp. In those cases, state regulators are pleased with the level of capital being placed in new infrastructure as well as the amount of investments in economic development. And with the repeal of the Public Utility Holding Company Act in last year's energy bill, cross-border offers could become more commonplace.

NorthWestern's tale is a long one. While the company was in bankruptcy in May 2004, Montana Public Power formed and made a $1.18 billion bid plus the assumption of $825 million in debt for NorthWestern Corp. By November 2004, however, NorthWestern had emerged from bankruptcy and was well into the process of selling its non-utility assets. At the point in time of its emergence from Chapter 11, the company's debt holders became its shareholders when the company distributed new shares.

NorthWestern formally rejected Montana Public Power's offer in June 2005. The group would come back again on two other occasions, only to be rebuffed. Beyond a substandard offering price, Bava says that the board felt the financing was uncertain and too many legal issues were outstanding.

By July 2005, another utility out of South Dakota, Black Hills, came to the table. It made a financially more attractive offer but it would have been an all-stock transaction. The stockholders were encouraged by the offer but Black Hills would not consent to a confidentiality agreement that would prevent a "tender offer" that could be made directly to shareholders. As a result, the board would then cast a wide net.

Regulatory Scrutiny

The board ultimately asked the company's management along with investment banking firm Credit Suisse to advise it and to come back with an analysis of what the strategic alternatives were. At this point, Black Hills decided to engage NorthWestern on its terms while Montana Public Power's advisors were given all the needed data to bid. Offers were made and the board narrowed the list to a handful of sound enterprises. The process culminated on April 25 with Babcock & Brown prevailing.

Certainly, Babcock & Brown is now the leading contender. But, it's possible that between now and the August 2, 2006 shareholder meeting that another bidder could come along and take center stage. If the offer would be superior, NorthWestern would be obliged to pay Babcock & Brown a termination fee of $50 million. But, once the stockholders would approve any deal, then it is in the hands of regulators.

Federal and state regulators will get a crack at it. The Federal Energy Regulatory Commission's main issue is whether the proposal would create a situation where too much market power would exist. This does not appear to be the case as Babcock & Brown is largely into renewable projects and transmission infrastructure. And so the battleground would shift to the states where NorthWestern operates: Montana, South Dakota and Nebraska.

And Montana, which watched the painful demise of Montana Power, is the key player. "The regulators are elected and have the interest of ratepayers at heart," says David Huard, partner with the Manatt firm. "We welcome their participation. We recognize this part of the process will be longer and more detailed, and fraught with more issues. But this is foreign investment from Australia and not from Dubai" -- a reference to the port deal that caused such a ruckus among U.S. lawmakers.

Clearly, U.S. markets are open to foreign capital. Perhaps the utility industry is analogous to that of the banking sector, which had been largely segmented and unable to expand outside state lines. But, the need for efficiency and new investment caused those laws -- initially set up to protect depositors -- to change. The elimination of artificial legal barriers has by many accounts created a stronger banking industry.

Clearly, the nullification of the Public Utilities Holding Company Act could have a similar effect. Generally speaking, domestic utilities may look to increase their regional footprints while foreign conglomerates may choose to expand their American presence. At the same time, non-traditional players such as ExxonMobil and Chevron might want to get in the game. To succeed, however, they must all remain committed to the business and the local economies. Appeasing state regulators has always been difficult.

Fewer regulatory constraints does give aggressive utilities a better chance at capturing new markets and increasing shareholder wealth. But more investment is needed: Estimates are that the industry must attract $150 billion in new capital over 20 years.

Babcock & Brown may or may not succeed in buying NorthWestern. But, the proposed deal charts a new course for the utility industry here in the United States that seeks well-heeled owners for much needed investment. If prior cross-border deals are any indication, neither customers nor regulators have much to fear.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

Copyright © 1996-2005 by CyberTech, Inc. All rights reserved.