Puget Energy Merger Approved and Review

December 31, 2008 | Comments (24)

The Puget Energy merger has finally been approved on December 30, 2008. After more than 1 year since I first got wind of this deal, the entire deal is expected to close in 2 weeks for $30 cash. Surprisingly, PSD is still trading at a discount to its final closing price. It is currently at $27.50. This still leaves room for a 9% gain with all uncertainty eliminated..

In my last post on PSD, let’s take a step back and review what happened, how I went about doing things, what went right and what went wrong.


The Puget Energy merger has finally been approved on December 30, 2008. After more than 1 year since I first got wind of this deal, the entire deal is expected to close in 2 weeks for $30 cash. Surprisingly, PSD is still trading at a discount to its final closing price. It is currently at $27.50. This still leaves room for a 9% gain with all uncertainty eliminated..

In my last post on PSD, let’s take a step back and review what happened, how I went about doing things, what went right and what went wrong.

Due Diligence

Here is a list of what was involved in my due diligence of PSD. A reference for new readers and future mergers.

A. Before purchasing any shares the important thing is that the conditions and state of the merger satisfies the following checklist. Also see this post to get started if interested in mergers.

  1. Due diligence by all parties
  2. Financing and regulator approval
  3. Get preliminary shareholder sentiment (or controlling shareholder approval)
  4. Obtain regulator (SEC, FCC, any and all) approval
  5. Get final shareholder approval at a meeting called for that purpose
  6. Insiders continually vesting or buying shares

B. Throughout the past 3 months of following the deal closely, I have been keeping up to date with all filings submitted by PSD to the SEC via RSS.

C. Read each annual report and quarterly report since the merger announcement to see whether there were any changes in the verbiage. Also read the proxy and other documents to understand the structure of the deal. This was a cash deal so it was straightforward.

D. I also spoke directly with investor relations of PSD and got the impression that she was not worried about the deal at all.

E. Documented my reasoning and thoughts so that I had something to refer back to and remind myself if the price went down and I started getting emotional.

F. Went to the Washington UTC website and quickly browsed and read the concluding statements of the filing documents of involved parties. This part was what helped me drown out noise, stay focused and to draw up conclusions and scenarios.

G. Assign odds to the merger. If you don’t know what the odds of winning are, don’t even consider playing.

What Went Right

I must say that I was lucky with this deal. Lucky because utility merger approvals are very unpredictable with lots of opposition, lucky because Washington State has a history or killing deals at the last minute, lucky because the markets ignored the facts and depressed the prices heavily in our favor.

Get Access to More Content
Enjoy what you're reading? Get instant access to our articles via email and receive bonus investing spreadsheets.

It was also a good thing that this deal was in my backyard and I had knowledge of the geography and makeup of the state and its affairs. Had PSD been in another state, my level of uncertainty would have been much higher. So if a merger is announced in your home state, always be sure to keep your eye on it. This is where you have home court advantage and something Wall Street will never know.

Wall Street not knowing = fear and uncertainty in the markets = good chance to pick up deals.

Add to that the buyer being an Australian company I was familiar with and it made the perfect arbitrage for me in 2008.

What Went Wrong

I had originally assumed the merger would take a week or so to close but I was completely off on this part. It ended up being 2 1/2 months. Although the upside gain more than compensated for the time, the period in which cash was held up was far too long and led me to miss out on better buying opportunities of SCHN (up 100%) and HANS (up 40%) which I had on my watch list.

What I will do differently next time is to think about the min and max time frame for completion just as we think about the min and max value of a company.

Asset Allocation

Back in September I had bought shares and just after the crash I sold it all while still ahead because I wanted to buy something else that got hammered.

Eventually the price went lower to its pre merger levels and I bought again, more this time. A couple weeks later, it went down to 10% below my purchase price on no news and I could sense people and some readers getting nervous. I doubled down at this point by selling my worst ideas. I didn’t want to make the same mistake I made with the Aquila merger by not investing enough to leave a decent profit after fees and taxes.

Puget Energy Coverage Closed at Old School Value

I am glad to say that on the last trading day of 2008, the announcement has lifted my sagging portfolio to a reasonable finish. The arbitrage helped keep my portfolio steady during the wild volatility as well as adding a nice return to my performance without having to speculate.

With 2009 expected to be worse than what we are going through now, I expect mergers to slow down further and fail more often. My decision to be involved in one merger at a time and focus on details has turned out to be safe and I will stick to this in the future.

Disclosure

I own shares of PSD at time of writing

[tags]PSD, special situation, mergers, arbitrage[/tags]

  • http://buylikebuffett.com/ Mark

    Good call on the Puget Energy merger. I am thinking about buying the shares at the $27.07 price and holding them until the completion of the deal.

    Mark’s last blog post..Alcoa

  • KC

    Thanks for the posts on this deal. I have been watching it tightly since I got in about a month ago. Being in Seattle I found it quite nice as a pulse on the local community as well.

    I also increased my position today when trading dipped, however from what I have read there is still is a period for parties to request reconsideration and appeal as well, so we are technically not out of the woods yet from what I can tell. Although I highly doubt anything will hold it up at this point.

  • http://www.oldschoolvalue.com Jae Jun

    I was thinking this would never close but sure am glad to see this end.
    Just 2 weeks before cash is in my account again.

    Thanks guys.

  • http://can-turtles-fly.blogspot.com/ Sivaram Velauthapillai

    Let’s not celebrate until it closes (yes, I’m prepared for almost anything after seeing some crazy outcomes :) )

    Thanks for keeping us updated with the deal over the months. I actually encountered your blog after researching the Puget merger (on SeekingAlpha) and am glad to have found your blog and your writings. Regardless of what happened, I think I found an interesting and worthwhile blog :)

    BTW, Happy New Year!

    Sivaram Velauthapillai’s last blog post..2008 Portfolio Performance

  • http://www.oldschoolvalue.com Jae Jun

    lol true. I better not get lulled into a false sense of security.

    Happy New Year to you too and I’m hoping to leech some of your ideas in 2009 ;)

  • Josh

    Hi Jae,

    Excellent reviews on PSD. Thanks for sharing your thoughts.

    Two questions:
    1. From PSD, they have 63 commitments. The approval news release talking about 78 commitments. Were you able to locate where those additional commitments required ?

    2. Puget Energy Chief Executive Steve Reynolds said the decision, and the additional conditions imposed by the UTC, will have to be reviewed by the company and the acquirers. If both accept the decision, the purchase could close in 15 business days.

    When do you think PSD will get back to UTC for compliance?

    (I am thinking they will do that on the 10th day (1/9) after check out which party will ask WTC for reconsideration.)

  • http://www.oldschoolvalue.com Jae Jun

    Hi Josh,

    1. There really is only 63 conditions, its in the filings and on the WUTC website.
    RIght down the bottom of this link are the 63 conditions
    http://www.sec.gov/Archives/edgar/data/81100/000119312509000402/dex991.htm

    and the actual filing only contains 63 as well.
    http://wutc.wa.gov/rms2.nsf/177d98baa5918c7388256a550064a61e/55643d79e36c97598825752f00826c46!OpenDocument

    2. I don’t recall reading anything on this.. do you have a link I can look at?

    Well PSD has to answer by Jan 9th because the deal is that it has to close within 15 days of the announcement.

  • Josh

    Hi Jae,

    In the following link, you can see what CEO said about PSD’s acceptance or compliance

    http://seattlepi.nwsource.com/business/394208_puget31.html?source=rss

    In the PR, you can see that there are 78 commitments.

    http://www.wutc.wa.gov/webimage.nsf/0/282DEDF46BFA989B8825753000005D8F

    I saw both docs you referred.

    The question is that what are those extra ones?

  • http://www.oldschoolvalue.com Jae Jun

    I think that may have been a mistake. A human wrote it after all. All the documents including the final one and the initial stipulation from July 23,2008 included 63 commitments.

  • http://compoundinglife.com KC

    PSD dividneds announced for shareholders of record January 21st 09. Does this mean we are waiting till at least the 21st before knowing if this is a done deal?

    KC’s last blog post..PSD: Dividend announced

  • Josh

    Hi Jae,

    There are more than 63 commitments needed. I’ve located those additions in attachment B of the 8-K

    http://phx.corporate-ir.net/phoenix.zhtml?c=63643&p=IROL-secToc&TOC=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvY29udGVudHMueG1sP2lwYWdlPTYwNTI0MDUmcmVwbz10ZW5r&ListAll=1

    Over there, you will find additional 15 commitments as a condition for UTC final approval. I think 2, 8 and 13 are more significant than others.

    In #2, by closing day, PSE needs to secure a contractually committed $1.6B credit facility.

    I believe investors has secured a $1B + 0.4B credit facility but not yet to $1.6B.

    Can they achieve this in a short period of time?

  • Josh

    Correction to my previous post. The additional commitment #2 is asking for $1.4B and no less than 3 years term. Please ignore my writing about $1.6B. What UTC wants is to have an affidavit to affirm this is done.

    Therefore, this should not an issue.

  • http://www.oldschoolvalue.com Jae Jun

    Thanks for the info Josh.
    Good to know that additional capital isnt required.

    Hopefully this whole deal with close by next week. I’ll see what the spread is late this week and decide whether I want to add more.

  • http://www.oldschoolvalue.com Jae Jun

    I wonder whether we can get the dividends.. I’m thinking it was just formality.
    Although that extra 4% yield would be nice.

  • http://compoundinglife.com Ken

    I would not be surprised if we do. The quarter ended Dec. 31st and the deal had not yet commenced so it would only seem right that shareholders collect a dividend for that quarter. But given the choice of dividend and waiting vs no dividend w/quick closure I would take the later.

    Ken’s last blog post..PSD: Dividend announced

  • http://www.dividendgrowthinvestor.com Dividend Growth Investor

    Based on my experience with Anheuser-Busch deal, most people got the $70 buyout price per share plus the dividend that was expected to be paid in the fourth quarter. If the board has announced that it will pay it at a particular date, most likely than not they will.

    Dividend Growth Investor’s last blog post..Dividends and The Great Depression

  • http://www.oldschoolvalue.com Jae Jun

    “Deadline passes for Puget Energy filing”

    Neither Puget Energy Inc. nor the attorney general’s public counsel office filed with the Utilities and Transportation Commission Friday to ask for a rehearing or clarification of a UTC order approving the sale of the Bellevue-based utility to an Australian-Canadian consortium.

    Friday was the deadline for such filing. Participants have until Jan. 29 to file a court challenge to the ruling.

    http://seattlepi.nwsource.com/business/395545_bizbriefs10.html

    This could mean the deal wont close until Jan 29??

  • Josh

    It does not look like smooth.

    I’ve been concerning about these additional 15 commitments. Some of them gave WUTC lots of power on new entity.

    I guess by Monday morning, there will be a PR to report that it will comply or why there will be a delay, which may cause price drop …. It can be another opportunity to pick up shares or run away pending on the reasons.

  • http://www.oldschoolvalue.com Jae Jun

    But the argument against the 15 commitments is that they are not new commitments. All 15 are part of the original 63 with additional clarifications. Nothing has been included or modified drastically so if the buyer and PSE have already agreed and no one has filed for a rehearing or clarification, doesn’t that mean all parties understand the deal?

    I’m not so worried about the 15 points but more about whether the deal will get delayed if someone files a court challenge.

  • MKL

    Hi Jae Jun, I have been trying to investigate this PSD purchase to understand and feel some certainty in this risk. Consequently, I am searching for suspicious bits of interest. What do you think of Stephen P Reynolds selling ~1,400 shares recently (reported the 6 January 2009) at $27.30, if he knows that the sale is going to go through shortly at $30?

    6-Jan-09 *5,622 PSD Option Exercise at $27.30 per share.
    (Cost of $153,480)
    6-Jan-09 *1,406 PSD Disposition (Non Open Market) at $27.30 per share.
    (Value of $38,383)
    2-Jan-09 768 IN Acquisition (Non Open Market) at $13.01 per share.
    (Value of $9,991)

  • http://www.oldschoolvalue.com Jae Jun

    Hi MKL,

    I dont understand what you mean by “to understand and feel some certainty in this risk”?

    As for insider selling, it bears no risk or influence on the fact of the merger. If he did sell because he knew something, he’d get caught for insider trading.

  • MKL

    Heh! Guess I might not understand either… Just trying to reassure myself. Just fearful in my greediness. Thanks for your comment.

  • http://www.oldschoolvalue.com Jae Jun

    “PSD: To ensure that shareholders continue to receive dividends at the current rate until closing of the merger, Puget Energy plans to pay a special pro rata dividend based on the number of days from the last regular dividend record date (Jan. 21, 2009) until the closing date of the merger, payable to shareholders of record as of a date prior to the closing to be established by the board of directors”

    News link

  • http://www.oldschoolvalue.com Jae Jun

    Merger closing on track.
    PSD debt financing complete. Press release

x
Get a FREE Mini Course on Valuation and Start Achieving Higher Stock Returns

Bonus: Receive Accompanying Investing Spreadsheets for Each Lesson