NextEra Energy (NEE 0.42%) has a long history of making acquisitions that move the needle for shareholders. In 2016, for example, the company bought several assets from fellow utility Southern Company, including Gulf Power, which should boost its earnings per share by $0.15 this year and another $0.20 in 2021. It has already taken steps to secure its next purchase after emerging as the recommended bidder for troubled South Carolina utility Santee Cooper.
On top of that, it has reportedly hired advisors to help prepare an offer for Evergy (EVRG 0.98%), which is under activist pressure to sell. If it's successful on both deals, NextEra Energy will supercharge an already high-powered growth plan.
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Putting on the pressure to perform
Evergy is a utility that provides power to customers in Kansas and Missouri. The current company formed in 2018 as a result of the merger of KCP&L and Westar Energy. That combination, however, hasn't created value for investors. This underperformance led activist investor Elliott Management to build a sizable position in the company and push it to make changes.
Elliott outlined two paths for creating value. The first option included replacing the management and board and focusing on an investment plan that would increase spending on infrastructure and optimize its operating costs. The other option is to pursue a strategic combination with another utility in a stock-for-stock merger.
Evergy has since settled with Elliott by appointing two new members to its board. It also outlined a five-year $7.6 billion capital plan to grow its earnings. However, the board also established a strategic review committee to explore ways to enhance shareholder value, which could include a merger. Several utilities are looking into a potential transaction with Evergy, including NextEra, American Electric Power, and Ameren. NextEra is in the preliminary stages of its exploration of a merger and might not submit a formal bid.
A shift in focus
NextEra's reported openness to bid on Evergy as well as its recent offer to buy South Carolina's Santee Cooper demonstrate a noticeable change in the company's strategy. Currently, it operates two utilities in Florida -- Florida Power & Light and Gulf Power -- as well as a competitive energy business that owns clean energy assets across the country. One of its focuses in recent years has been on snapping up utilities in its home state. In addition to buying Gulf Power, it also recently acquired the municipal electric system of Vero Beach. On top of that, it reportedly bid on a municipal utility in Jacksonville, Florida, last year, but that entity's board rejected all offers.
However, acquisitions of Santee Cooper and Evergy would extend the geographical focus of the company's utility segment beyond the state of Florida. That comes with some risk as it wouldn't be able to integrate either entity into its existing operations.
On the other hand, those deals could richly reward investors given NextEra's knack for improving the operations of acquired assets. In one year alone, it has increased Gulf Power's adjusted earnings by more 25%. The company sees a similar upside potential at the poorly run acquisition targets. At Santee Cooper, for example, it envisions the possibility of investing $2.3 billion to transform it into a lower cost, cleaner utility by replacing coal plants with natural gas and solar. Meanwhile, Evergy is spending money on wind projects, which does create some synergies with NextEra's energy resources segment. NextEra's track record of making high-return clean energy investments could enable it to create more value for investors if it bought these utilities.
However, the company doesn't need either deal to grow shareholder value in the near term. It already anticipates that its earnings will increase by 6% to 8% per year through 2022, plus the added boost from Gulf Power. That's one of the fastest rates in the utility sector. As such, its ability to secure either transaction would bolster an already strong growth profile. Though that assumes no major impact from the COVID-19 outbreak and the likely economic recession in the coming months.
Interesting storylines to watch
NextEra Energy is working on expanding its utility operations beyond the borders of Florida by bidding on Santee Cooper and reportedly considering making an offer for Evergy. Neither transaction is a sure thing right now, but it shows that the company is open to expanding in new areas if it can find opportunities that could create additional value for its investors. That makes these pursuits interesting storylines to watch because its success in securing either acquisition could enhance the company's ability to continue generating market-beating total returns for its shareholders.
