NEW YORK, Jan 3 (IFR) - Sempra Energy shares rose more than 2% on Wednesday after the natural gas utility revealed plans to raise up to US$4.6bn to fund its acquisition of Texas power distributor Oncor.
California-based Sempra’s stock was up as much as 2.6% to US$108.05 per share on news of the dual-tranche equity and equity-linked offering to fund the pending US$9.45bn purchase.
Sempra said it would sell US$2.5bn of common equity and US$1.5bn of three–year mandatory convertible preferred shares, raising US$4.6bn in all if 15% overallotment options are used.
The mandatory is being marketed with a 6%-6.5% dividend and a 17.5%-22.5% conversion premium.
The smaller-than-expected offering helped relieve pressure on Sempra’s stock price, which slumped last month when fellow California utility PG&E suspended its share dividends.
PG&E’s move, amid uncertainty about the costs associated with the state’s rash of forest fires, pushed Sempra shares as low as US$105.03 last month from US$122.98 in mid-November.
Morgan Stanley, RBC Capital Markets and Barclays are leading Sempra’s offerings, which are scheduled to price after the market close on Thursday.
A strong market backdrop early in the new year and the smaller-than-expected deal size contributed to the positive market reaction, a banker close to the deal said.
Both offerings were well oversubscribed as of Wednesday morning, the banker said.
Sempra agreed to buy Oncor in August after a long-winded sales process for the key remaining assets of bankrupt utility Energy Future Holdings, formerly known as TXU.
In October, Sempra revised the financing plan for Oncor, stating it would fund 65% of the cost with its own equity.
That implied a US$6.1bn equity raise, or more than the US$4.6bn now being sought.
Sempra said in an SEC filing Tuesday that it could use cash on hand, the proceeds of asset sales and future stock sales to make up the difference of about US$1.5bn.
The banker said one option was for Sempra to undertake an at-the-market stock sales at a later date.
California, where Sempra owns the San Diego Gas & Electric Company and the Southern California Gas Company, is one of the few US states where so-called “inverse condemnation” can leave utilities responsible for property damage from wildfires.
Oncor will diversify Sempra’s business away from California and enhance its growth prospects, though it is only modestly accretive to earnings in the first four years.
Sempra last month said it had the support of key stakeholders as part of the regulatory approval process, though it is awaiting final approval from the Public Utility Commission of Texas.
While that is expected in the first half of 2018, Sempra has structured the equity sale as a forward sale agreement that delays the issuance of new shares until as late as December 2019, giving it the ability to defer dilution if the regulatory approval process takes longer than expected.
Mandatory convertible is standard for large M&A financings, and allows Sempra to access a different type of investor (convert specialists) and ease the capital call on the market.
The maturity of a number of other mandatory convertible securities in the next three months - and a need to replace those securities - is driving demand for the Sempra offering, the banker said. (Reporting by Anthony Hughes; Editing by Marc Carnegie)