The California utilities mess is driving down utilities stocks nationwide, creating appealing bargains
Mario J. Gabelli, Tim O'Brien
From the Print Edition:
The Cuba Issue, May/Jun 01
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Among the Fund's small fry, our favorite takeout candidate is Kansas City Power & Light (KLT-$25.95 NYSE, as of March 7), which serves metropolitan Kansas City. KLT has been to the altar twice in the past three years. A friendly offer from Utilicorp was topped by a hostile bid from Western Resources. This turned into a comedy of errors. With Western Resources stock moving higher following its all-stock bid, Western wanted to renegotiate terms with KLT. KLT balked, and when Western Resources ran into trouble and its stock cratered, KLT walked away. Western Resources is now being acquired by Public Service of New Mexico.
We believe KLT is still up for grabs. Utilicorp could come calling again. Ameren, Missouri's largest utility, might be interested. Once the Western Resources acquisition is completed, Public Service of New Mexico might take a look at KLT. KLT is trading at about 12 times earnings, a slight discount to the utilities stock average of 13, and its $1.66 dividend translates into a 6 percent-plus yield. If a buyer does materialize, we could see a deal in the $32 to $33 range.
Another possible takeout company in the fund, TECO Energy (TE-$29.43 NYSE, as of March 5), the old Tampa Electric Co., diversified into several nonutilities businesses. Initially, this was successful, but in recent years these businesses have run into problems. The diversified operations have been refocused and rationalized, and now TECO's emphasis is on exploiting its wholesale power-generation assets. Even though its earnings growth is superior to the average utilities company, TE is trading at just an industry average price/earnings multiple. Last year, Carolina Power & Light bought Florida Progress in neighboring St. Petersburg at a handsome 17 P/E multiple. Valuing TECO at the same multiple would put the takeout price at about $40 per share. The lower unit costs that could be realized by one company serving both Tampa and St. Petersburg would go a long way towards recouping the premium that a buyer would have to pay for this utilities gem.
The utilities meltdown in California has taken utilities stock prices down across the board. We strongly believe California's problems are due to a faulty deregulation plan, which was not replicated in other states. We don't know what the final outcome will be for PG&E and Southern California Edison. However, as it becomes clear that California's problems are unique, non-California utilities stocks should rise to prices that reflect their strong and improving earnings potential and the prospects for values being realized through further consolidation in the industry. A year from now, we think that early 2001 will have proven to be an attractive buying opportunity.
Mario J. Gabelli is the founder and chairman of Gabelli Funds Inc., a Rye, New York-based financial services company. He appears regularly on CNN and CNBC.