Eversource Energy (ES)

[eastunder]

Nuclear Takeover

By Mike Thiessen - January 15, 2013|

http://beta.fool.com/mthiessen/2013/01/15/nuclear-takeover/21600/?source=eogyholnk0000001

Salt Lake City-based nuclear energy services provider EnergySolutions (NYSE: ES) has agreed to a formal purchase offer from Short Hills, New Jersey-based private equity firm Energy Capital Partners II. Announced after the close of trading on January 4, the terms of the $1.1 billion all-cash deal are straightforward: On its closing date, EnergySolutions shareholders will receive cash payments of $3.75 per share. Already approved by the company's board of directors, the deal must now be approved by EnergySolutions shareholders. Assuming that no other issues arise to derail the agreement, the merger could close during the second quarter of 2013.

Relative to EnergySolutions's December 31, 2012 closing price of $3.12 per share, the Energy Capital offer represents a premium of about 20.2 percent. However, the company has traded above $5 per share as recently as March of 2012. Until the acute phase of the financial crisis set in during the summer of 2008, it regularly traded above $20 per share.

A number of secular and specific problems have contributed to this massive loss in value, including a challenging nuclear regulatory environment, uncertainty about new waste transportation and disposal protocols, and the 2011 Fukushima Daiichi reactor meltdown in Japan. However, it is clear that the company remains attractive at these relatively low levels. Shareholders who bought into the firm within the past two years are likely to be rewarded for their faith.

EnergySolutions is a multi-pronged company that specializes in cleaning up decommissioned nuclear plants and securing highly radioactive sites. Further, it provides transportation and disposal services for medium-grade nuclear waste and provides sequestration solutions for more dangerous byproducts. It also produces and utilizes special equipment designed to treat waste created by functioning nuclear power plants and fuel-production facilities. EnergySolutions's decommissioning and waste-disposal operations are focused primarily on the North American market. It conducts its treatment and management services for active facilities in North America as well as Europe. The company employs about 5,700 people and lost $188 million on $1.8 billion in gross revenues in 2011.

Energy Capital Partners II is one of the largest private equity funds to focus exclusively on the utilities market. It specializes in leveraged and internally-funded buyouts of high-value energy services and exploration companies in the oil, gas, renewable and nuclear energy industries. Although Energy Capital Partners is a private entity with no obligation to make detailed financial disclosures, it is known that the company's portfolio is worth at least $7 billion. For a private equity firm of this size, the EnergySolutions acquisition is notable but not exceptional.

While EnergySolutions has few direct competitors, its acquisition is part of a broader wave of consolidation in the nuclear power and services industries. For instance, Baton Rouge, Louisiana-based nuclear logistics firm Shaw Group (NYSE: SHAW) was recently acquired by the The Hague, Netherlands-based Chicago Iron & Bridge Company (NYSE: CBI) for more than $3 billion. Often mentioned as possible rival bidder for EnergySolutions, Chicago Iron & Bridge Company manages a wide portfolio of energy-services companies and provides support and design services for many outside clients. Relative to its peers, it is well-capitalized and delivers solid shareholder value.

Importantly, the merger was widely viewed as a raw deal for Shaw: Despite its massive cash reserves of over $2 billion, the company was sold at a relative discount to its peers. Investors who view the EnergySolutions deal as a similarly bad deal would do well to look at the nuclear energy industry's recent malaise. If solid companies like Shaw Group can be snapped up at deep discounts, weaker outfits like EnergySolutions may stand little chance of remaining independent in the years to come.

The proposed merger must clear several hurdles before becoming a done deal. First, at least one law firm has launched an investigation into the terms of the deal that could result in the formation of a shareholder-led class action lawsuit. Although a formal suit has yet to be filed, the investigation alleges that the transaction undervalues EnergySolutions by at least 25 percent. Given the precipitous drop in EnergySolutions shares over the past two years, the investigation's claims appear to be dubious. However, any formal lawsuit could slow or even scuttle the deal.

The potential lawsuit might also encourage rival bidders to step forward. As it currently stands, the merger cannot be finalized until after a February 6 bid-solicitation deadline. If another bidder launches a more attractive counteroffer for EnergySolutions, the company's fate could remain uncertain for several more months.

Finally, the merger awaits approval from shareholders and regulators. Since EnergySolutions's board of directors has already approved the deal, it appears likely that the company's shareholders will follow suit. Regulatory approval is less certain: To determine whether the addition of EnergySolutions to Energy Capital's existing nuclear asset portfolio might present anti-competitive issues, the merger is currently being scrutinized by American and British regulators.

If the proposed merger goes through, new EnergySolutions shareholders will be assured of a solid return on their investments. On the other hand, shareholders who have stuck with company since before the financial crisis might feel cheated. Many investors are holding out for a more attractive counteroffer or a new offer from Energy Capital. In the absence of such a development, the current deal represents the best possible outcome for battered EnergySolutions shareholders.