Hydro One Ltd. (TSX:H) announced on Wednesday it has agreed to purchase U.S.-based Avista Corp. (NYSE:AVA) for $4.4 billion U.S. The deal comes amid growing shareholder concern surrounding the utilities company’s current portfolio of assets, all of which are centered in the Province of Ontario.
Geographic diversification in any portfolio is an important thing, and critics of Hydro One have for a long time decried the current lack of portfolio diversification among Hydro One’s portfolio. Diversifying into the U.S. market should provide increased long-term growth potential for the utilities company, and in this regard many optimists suggest this acquisition could actually pan out in favor of Hydro One’s shareholders.
Only recently privatized as a way for the Ontario government to raise capital amid large budget deficits and the need to get closer to a balanced budget, shares of Hydro One have decreased 15% from their 52-week high experienced in late 2016. The Ontario government recently initiated a "Fair Hydro Plan" to reduce energy rates for the average consumer in Ontario, a plan which stands to significantly impact the company’s earnings moving forward.
While this acquisition is a step in the right direction from a strategic standpoint, the fact remains that Hydro One paid a significant premium (more than 22%) to acquire Avista, and will now be saddled with a significant debt load to go along with a significant portfolio of assets in Ontario which are expected to underperfrom for the foreseeable future.
A long-term investor looking for a utilities position should look toward a host of other Canadian utilities companies which have also expanded into the U.S.
Invest wisely, my friends.
