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Arbs await better CH Energy deal

by Scott Stuart | Published February 22, 2012 at 5:00 PM

New York gas and electric utility CH Energy Group Inc. has been trading at a narrow spread to its $970 million acquisition by Canada's Fortis Inc., possibly on expectation that Fortis will have to increase the price.

Fortis and CH Energy, based in Poughkeepsie, Tuesday, Feb. 21, announced a merger at $65 per share for CH Energy. CH Energy shares traded Wednesday for $66.39, an 83 cent premium to the Fortis deal without accounting for dividends. Fortis expects the deal to close within a year. The deal has an initial termination date of Feb. 20, 2013, allowing for some extension for regulatory approvals. CH Energy currently pays a dividend of 55.5 cents and could, under the merger agreement, increase that payment to 57 cents after nine months. Assuming the company pays a further $2.23 in dividends during the coming 12 months, the deal spread Wednesday was about 85 cents, offering an annualized return of just 1.3%.

CH Energy was not auctioned, according to a source familiar with the merger. Fortis approached CH Energy several months ago, and the CH Energy board decided that the price and strategic combination were attractive for its shareholders, the source said. The talks were exclusive, and CH Energy did not seek out other bids, the source said.

Risk arbitrageurs apparently expect either a spoiler bid or for Fortis to boost the merger terms, which offer about a 10.5% premium to CH Energy before the deal announcement, to get shareholder approval.

Fortis lost its attempt to acquire Central Vermont Public Service Corp. last summer when Gaz Métro LP of Quebec outbid it. Gaz Métro was already operating in Vermont through Green Mountain Power Corp.

CH Energy is the parent of Central Hudson Gas & Electric Corp., which has regulated gas and electricity businesses in mid-New York and operates gas distribution pipelines in the state.

Gabelli Funds LLC. owns about 10.4% of CH Energy, according to a 13G filing from early February. Gabelli filed under form 13D in July 2010 on its then-9% stake. Despite the change to a passive filing, Gabelli reportedly has doubts about the valuation of CH Energy and its potential given the proximity of its gas distribution business to the Marcellus Shale.

If Gabelli refiles on CH Energy on a form 13D, implying an activist stance, that itself could send CH Energy shares up.

Neither company held investor calls on the deal. CH Energy is obligated under the merger agreement to file a preliminary proxy by the end of March.

The merger calls for a breakup fee of $19.7 million, or $1.32 per share -- about 2% of the equity value of the transaction. If CH Energy entertains recognizing another bid as superior to the Fortis deal it must provide the buyer with a five-business-day matching period. A spoiler bid must surface before CH Energy shareholder approval.

The companies anticipate holding a special meeting during the second quarter.

Aside from the shareholder approval, the merger requires approvals by the New York State Public Service Commission and the Federal Energy Regulatory Commission, as well as a nod from the Committee on Foreign Investment in the U.S.

The New York commission is expected to be the final hurdle for the deal and its decision is expected during the first quarter of 2013.

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Tags: CH Energy Group Inc. | Fortis Inc | utilities

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