NextEra and Dominion to Combine in Largest-Ever Utilities Merger

NextEra Energy NEE has offered to acquire Dominion Energy D for $67 billion. NextEra traded down 5%, while Dominion traded up 10% as of the time of writing on May 18.

Why it matters: Dominion shareholders will receive 0.8138 shares of NextEra, plus a one-time $360 million payment upon the deal’s close. Dominion shareholders will own approximately 25.5% of the combined company.

• The combined company’s forecast for 9%-plus earnings growth, while maintaining NextEra’s dividend policy, will accelerate growth for both companies after the deal closes.

The bottom line: We plan to increase our fair value estimate for Dominion to $73 per share and lower it for NextEra to $88. Our Narrow Economic Moat Ratings for both firms are unchanged.

• Both utilities traded at premiums to our fair value estimates before the deal was announced on May 18. Most of the premium paid by NextEra is offset by issuing shares above our fair value estimate and operational synergies of the combined entity.

Big picture: We think the strategic rationale for the transaction is strong for both Dominion and NextEra.

• It allows Dominion to leverage NextEra’s strong balance sheet to accelerate investment, particularly in Virginia.
• We view the transaction as allowing NextEra to accelerate its data center ambitions, which had trailed those of its regulated peers, by using Dominion’s expertise and relationships to expedite NextEra’s data center hub plans. It would also increase NextEra’s total business from regulated utilities to 80% of earnings from the current 70%, which we view positively.

Long view: The transaction will require numerous federal and state regulatory approvals, including North Carolina, South Carolina, and Virginia, with the path to closing the transaction in 12-18 months.