Utilities Target Evergy For Acquisition

By Michael Hooper

Several utilities are considering acquiring Evergy (EVRG), the electric utility that serves Kansas and Missouri.

NextEra Energy (NEE) is working with advisers to consider an offer for Evergy, according to a Reorg M&A report. NextEra has hired Citi to advise on the potential acquisition. Other utilities looking at Evergy are American Electric Power (AEP) and Ameren (AEE), reported Seeking Alpha and a report by TheFly.com.

All of this interest in Evergy follows a board shake-up with the addition of two board members from activist investor Elliott Management. Elliott acquired 11.3 million shares of Evergy and pressured the board to change strategy including putting itself up for sale. Initially Evergy leadership rebuffed Elliott last fall but then caved in and allowed two Elliott members onto the board, then changed its capital plan to accommodate Elliott.

NextEra Energy, based in Houston, operates several wind farms in Kansas. Evergy purchases power from multiple wind farms that are owned by NextEra, said Gina Penzig, spokeswoman for Evergy.

When asked to comment about NextEra's interest in acquiring Evergy, Penzig said, "We don’t comment on speculation in the marketplace." 

On March 2, Evergy announced that it had entered into an agreement with Elliott Management. As part of the agreement two new independent directors joined the Evergy board of directors effective March 3. In addition, the board established a new Strategic Review and Operations Committee with a mandate to explore ways to enhance shareholder value.

The new additions are NRG Energy CFO Kirk Andrews and former Energy Future Holdings CEO Paul Keglivic.

Andrews has led NRG through a three-year transformation plan that began in 2017 and was initiated by an agreement with Elliott and another Dallas activist investor, the Kansas City Business Journal reported.

Keglivic has held several positions including CEO, CFO and chief restructuring officer during his 10 years with Energy Future Holdings. The Dallas-based company, which filed for bankruptcy in 2014, named him its CEO in 2016. The company was acquired by Sempra Energy in March 2018, when he left the company.

The additions push the size of the Evergy board to 17 but four current board members will retire in May.

Evergy is already changing its strategy because of pressure from Elliott Management. Evergy has increased its five-year capital investment plan to $7.6 billion through 2024 compared to $6.1 billion in its prior plan. Evergy plans to spend $1.5 billion per year for five years in projects that modernize the electric grid, improve reliability while reducing operations and maintenance expense.

With the increased capital investment, Evergy has elected to halt the remainder of its share repurchase program.

Evergy was formed in 2018 with the combination of KCP&L and Westar Energy. The company has 1.6 million customers in Kansas and Missouri.

In 2019, Evergy earned $670 million or $2.79 per share compared with $536 million or $2.50 per share for 2018.

Evergy has been cutting staff through attrition and not replacing them when they retire or leave in order to reduce operating expenses.

One of the first things that Elliott wanted after acquiring shares of Evergy was to put the company up for sale, according to comments made by Evergy leadership. The problem with this is Evergy just went through a merger between KCP&L and Westar Energy. That merger took years of work and hundreds of hours of testimony and documents before the Kansas Corporation Commission. Initially, the KCC rejected the sale because the deal required too much debt. The two companies changed the deal to a stock for stock merger. Then the KCC approved the deal.

I have been buying shares of Evergy at $52, $55 and $58 per share, with a current average price of $57.36 per share. Evergy stock was up 11% to $57.88 per share on Monday while the S&P 500 was up 7%. I believe Evergy remains a buy below $65 per share. Evergy stock had reached $76.57 per share prior to the stock market crash due to the coronavirus outbreak.

If Evergy gets acquired, you can expect another board shakeup and possibly layoffs. That is a possible outcome of all this M&A activity. You let in an activist investor like Paul Singer, founder of Elliott, you are likely to see big changes.

Editors Note: The author owns shares of Evergy and may buy more in the future.