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ETR Down on Rejection of Proposed Merger

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Entergy Corporation's (ETR - Free Report) proposed merger with ITC Holdings Corporation has been rejected by the Mississippi Public Service Commission (“MPSC”). Entergy Corporation’s share price edged down 0.7% from the previous day's closing to $60.85 per share. We believe the decline reflected the negative reaction of the market resulting from the rejection of the proposed merger by the MPSC.

MPSC rejected the transaction on the ground that it is not going to be a lucrative move for customers. The approval of the deal would lead to an increase in the electricity rate of Mississippi customers by $300 million over 30 years.

Entergy Corporation has issued a statement on MPSC’s verdict. Currently, the company will work together with ITC Holdings to decide on the next plan of action. Entergy Corporation can apply for a rehearing request to the MPSC.

The Federal Energy Regulatory Commission approved the proposed merger in Jun 2013. The companies also filed merger request with other regulators including Arkansas, Louisiana and Texas and the city of New Orleans, where Entergy Corporation operates.

Initially, in Dec 2011, Entergy Corporation announced that the company has entered into a definitive agreement with ITC Holdings to sell its electric transmission business to the latter for approximately $1.8 billion.

Per the agreement, Entergy Corporation would have divested its electric transmission business to a newly formed entity known as Mid South TransCo LLC ("Transco"). Post merger, Entergy Corporation would have approximately 50.1% stake in ITC Holdings in exchange for their shares in TransCo. The existing shareholders of ITC Holdings would have held the rest 49.9% stake of the combined entity.

Entergy Corporation intended to utilize a major part of the cash proceeds from the transaction to redeem debt. Apart from contributing to the earnings, the transaction would have allowed the company to focus more on its power generation and distribution businesses.

We note that in the U.S., projected capital investment in the electric utility industry is approximately $2 trillion over the next 20 years. Entergy Corporation expected the divestiture to provide more investment alternatives.

Entergy Corporation plans to invest $6.7 billion over the three-year period from 2013 to 2015. Of this, $3.3 billion will be for maintenance while the rest will be invested for new capital projects. These projects will enable the company to provide uninterrupted services to more customers, thereby improving revenues.

The company currently has a Zacks Rank #3 (Hold). Other stocks from the industry that are presently performing well include Westar Energy, Inc. with a Zacks Rank #1 (Strong Buy) and Exelon Corporation (EXC - Free Report) with a Zacks Rank #2 (Buy).

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