NextEra Reportedly Pursues Duke Energy; Duke Rebuffs
We are maintaining our fair value estimates and moat trends for both of these companies in the utilities sector.
We are maintaining our $250 per-share fair value estimate for NextEra Energy (NEE) and $92 fair value estimate for Duke Energy (DUK) after reports that Duke declined a takeover bid from NextEra in what would be the largest utility deal ever. Our narrow moat and stable moat trends for both utilities remain unchanged.
The financial terms of the reported offer weren't disclosed, but we believe NextEra would have plenty of leeway with its premium currency. NextEra currently trades at 28 times forward earnings, and a 13% premium to our fair value estimate, compared with just 15 times forward earnings for Duke. We also think there would be the potential for sizable operating synergies, particularly in Florida.
Despite Duke's reported lack of interest, we believe NextEra management remains interested in pursuing a deal. NextEra management has been in the market for an acquisition for some time, previously missing out on Oncor, Hawaiian Electric, and Evergy.
Strategically, we think a NextEra-Duke tie-up makes sense. Geographically, the utilities line up nicely, with overlap in Florida, which we view to be the premium regulatory jurisdiction for utilities. While the Carolinas have regulatory headwinds, we view the regulatory environment as average but constructive overall. We also think NextEra would benefit from renewable energy growth opportunities throughout Duke's service territory
Duke has underperformed recently, making it susceptible to NextEra's approach. Management recently abandoned the Atlantic Coast Pipeline, pushing its five-year annual growth outlook to the low end of management's 4%-6% range, one of the lowest in the industry. Duke's earnings have lagged recently, consistently falling to the lower band of its targeted range.
Regulatory approval would be a high hurdle, but we think NextEra's history of efficient operations and low customer bills would win over regulators. We think NextEra management are among the few that we think could execute a large deal.
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Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.