By William Opalka
ITC Holdings, the largest independent transmission operator in the U.S., agreed to be acquired by Canadian utility operator Fortis in a deal valued at $11.3 billion, the companies announced Tuesday.
ITC is based in Novi, Mich., where it will remain as an independent company. It has been seeking a strategic partner since November.
ITC shareholders will receive $22.57 in cash and 0.752 Fortis shares per ITC share. The companies said the price reflects a 33% premium over ITC’s closing share price on Nov. 27, 2015, before news broke that ITC was shopping itself. The deal is worth $6.9 billion in cash and stock and assumes $4.4 billion in ITC debt.
For Fortis, the attraction of ITC — a pure-play transmission company — is its high regulated returns and the prospect of future growth. It earned an adjusted return on equity of more than 17% in 2014, according to Bloomberg, well above the 11% average of electric utility holding companies.
In a presentation to analysts Tuesday, the company cited a Brattle Group projection that the grid will require investments of $120 billion to $160 billion per decade through 2030 because of the shift away from coal power and integration of more wind power under EPA’s Clean Power Plan.
Fortis said the deal would make it the 13th largest North American public utility — up from its current number 20 ranking— with an enterprise value of $30 billion.
“Fortis has grown its business through strategic acquisitions that have contributed to strong organic growth over the past decade. Our performance in 2015 is a clear demonstration of the success of this strategy,” Fortis CEO Barry Perry said in a statement. “The acquisition of ITC … is a continuation of this growth strategy. ITC not only further strengthens and diversifies our business, but it also accelerates our growth.”
ITC owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma. It serves a combined peak load of more than 26,000 MW extending over 15,600 miles of transmission lines. All of its employees would be retained, Fortis said.
The deal has been approved by both companies’ boards of directors and will be presented to shareholders. Upon closing, ITC will become a Fortis subsidiary, with its shareholders holding approximately 27% of Fortis stock.
Regulators from the various states, FERC, the Committee on Foreign Investment in the United States, the Federal Trade Commission and the Department of Justice will have to approve the deal. Closing is expected in late 2016.
ITC CEO Joseph Welch said the acquisition “accomplishes our objectives by better positioning the company to have a higher level of focus on pursuing our long-term strategy of investing in transmission opportunities to improve reliability, expand access to power markets and allow new generating resources to interconnect to transmission systems and lower the overall cost of delivered energy for customers.”
Fortis, which is now listed on the Toronto Stock Exchange, will apply to list its common shares on the New York Stock Exchange.
Fortis owns New York-based distribution utility Central Hudson Gas and Electric and UNS Energy in Arizona, the parent of Tucson Gas & Electric.
Fortis said the acquisition aligns with its strategy of building its portfolio by acquiring low-risk regulated energy companies with predictable returns. The transaction is expected to provide earnings of 5% per share in its first full year of operation.
The company will finance the acquisition by issuing $2 billion in debt and by selling up to 19.9% of ITC to other investors.