Duke Energy Seeks Pricey Growth in Piedmont Acquisition
We see strong strategic rationale in the Duke/Piedmont tie up but the benefits are coming at a steep cost, writes Morningstar’s Andy Bischof.
After reviewing Duke Energy's (DUK) all-cash offer of $4.9 billion, or $60 per share, for Piedmont Natural Gas (PNY), we plan to lower our Duke fair value estimate to $81 per share from $83 and increase our Piedmont fair value estimate to $53 per share from $30. We are maintaining our narrow moat and moat trend ratings for both. Our fair value estimates assume a 75% probability the deal closes, as we see little regulatory pushback for deal approval.
For Duke, we see strong strategic rationale in acquiring a gas distribution with demographic overlap and strong potential for growth opportunities. Duke is no stranger to Piedmont, having recently teamed with the company on the $5 billion Atlantic Coast Pipeline project. We expect that Duke's size combined with its own need for new gas infrastructure in its Carolina operating region to facilitate an ongoing shift from coal generation to gas generation could bring some material growth opportunities. The deal is also a way for the company to assuage investor concern about its 4%-6% growth target, given Piedmont's healthy customer growth, and shift focus toward a highly regulated business mix, with less reliance on the troubled Latin American operations. We believe Duke's strong management team will successfully integrate Piedmont.
In our opinion, all these benefits come at a steep price for Duke shareholders. The 100% premium to our $30 fair value estimate, $6.7 billion enterprise value, 3.5 times book value, and 31 times earnings per share in our current estimates are all well above an already pricey local gas distribution company's valuations. Duke will use its strong balance sheet to fund the acquisition, with the majority of the funding coming from new holding company debt and $500 million-$750 million in equity issuance.
The deal is very favorable for Piedmont shareholders, as it significantly overvalues the company's cash flows, and we strongly recommend that they approve the deal as offered.
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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.