The drop in Hawaiian Electric Industries’ share price since December could be a sign investors doubt the proposed sale to Florida-based NextEra Energy Inc. will be approved.
Those with money on the line seem to be saying the state Public Utilities Commission’s approval, the last major regulatory step needed before the sale closes, may not be forthcoming.
"Hawaiian (Electric) is not trading as if the deal is going through," said Tim Winter, equity analyst at Gabelli & Co. Inc., an investment firm in Rye, N.Y.
"I think the market is telling you there is about a 50 percent chance the deal is going to happen," added Charles Fishman, equity analyst at Morningstar Inc. "Most mergers you would have a higher confidence level."
NextEra announced its intent to purchase HEI for $4.3 billion, or roughly $34 a share, on Dec. 3. The next day HEI’s share price — which had been trading around $28 a share — jumped 14 percent to close at $32.22. That’s typical when a purchase is announced as investors anticipate the shares will rise to match the sale price.
HEI shares continued rising until reaching a closing high of $34.83 on Jan. 29. In February the price started what became a long, slow decline back to the $28 level. It closed at $28.24 on Friday.
The biggest two-day drop in HEI’s share price this year came after Gov. David Ige said he is opposed to the sale in its current form. On July 21, when Ige held a news conference to announce his opposition, the share price fell 3.3 percent, and it fell another 3.8 percent the following day.
"There obviously was a move that day," said Paul Patterson, analyst at Glenrock Associates LLC, a New York investment firm.
According to Fishman’s estimates, HEI stock is trading 12 percent below where it would be if investors were confident the sale was going to close. If the sale were to disappear, HEI would be trading at $27, Fishman said.
The risk because of regulatory influence is common to utility mergers, Patterson said.
"There is a graveyard of failed utility deals. It is not unheard of at all," he said. "With any of these utility regulatory approvals, there is always a question mark."
Of course, evaluating the likelihood of NextEra’s purchase being approved is just one element investors look at to determine HEI’s stock price. The direction of the economy, recent earnings reports and any other industry or company news affect share price.
Much of this year, HEI’s stock has been moving in tandem with NextEra and other electric utility stocks. On Friday, for example, NextEra and HEI fell about 3 percent as it appeared more likely the Federal Reserve will raise interest rates next month.
Since its recent peak on Jan. 29, HEI shares have dropped 18.9 percent. NextEra is down 11.48 percent in that same period, and the Dow Jones Utility Average is down 14.7 percent.
Another event that may have caused the price of HEI to drop in late August was a regulatory rejection of a similar utility acquisition on the East Coast. On Aug. 25 the Public Service Commission of the District of Columbia rejected Chicago-based Exelon Corp.’s proposal to buy Pepco Holdings Inc.
On Oct. 6 Pepco and Exelon announced they reached a settlement with the District of Columbia, paving the way for the sale to go through.
"I encounter people who are somewhat surprised that these deals aren’t accepted or there are conditions," Patterson said. "People should be aware that with any of these transactions, until it is over it isn’t over."
