More water please
Water is essential for life, but in the US stock market water utilities have long registered as little more than an afterthought to investors.
At the time of writing, water represented only about 4% of the US$1trn US utilities sector, which is dominated by power and gas companies with greater scale and often higher growth prospects.
The subsector’s neglected status was apparent when Aqua America, a water and wastewater utility serving more than three million people in eight US states, agreed to buy gas distributor Peoples for US$4.3bn in October 2018.
Ahead of the deal’s expected close in mid-2019, Aqua needed to raise a large amount of equity to keep regulators and ratings agencies comfortable with its balance sheet.
Yet the US$2.5bn equity requirement represented 40% of Aqua’s market capitalisation, much higher than the average of 15% for utility M&A-related equity financings this decade.
Compounding the challenge, retail investors accounted for half of the shareholder register, and passive funds about a quarter.
While waiting for proforma financials, management conducted an extensive non-deal roadshow that included more than 200 meetings with utility, infrastructure and ESG investors. Aqua also hosted a sell-side analyst roundtable to try to expand its limited research coverage.
Aqua and advisers Goldman Sachs and RBC Capital Markets ultimately split the funding overhang into three distinct elements to access different types of investors and limit share price pressure from the weighty equity burden.
The first element was a US$750m private placement with seasoned infrastructure investor Canada Pension Plan Investment Board announced in late March.
Two weeks later, in mid-April, Aqua launched a three-day marketing effort to sell US$1.3bn of common equity and US$690m of mandatory convertible bonds (including greenshoes on both).
“What we all recognised was this was a critically important equity raise for Aqua that needed a fair amount of creativity but also an extreme amount of focused and detailed work,” said Chuck Park, Goldman’s head of natural resources ECM.
About 90 new investors, including specialists and generalists, received allocations across the two tranches.
The common stock sale priced at US$34.62 or a 5.9% file-to-offer discount, the price matching the issue price of the stock sold to CPPIB. Aqua shares have since climbed to as high as US$46.90 in late October.
The MCB, structured as a tangible equity unit with an embedded amortising note to preserve earnings per share and ensure ratings benefits, priced with a 6% coupon and 22.5% conversion premium, the best end of talk for the issuer.
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