Australia's Babcock & Brown Infrastructure made a revised takeover offer for U.S. utility NorthWestern Energy after a regulator blocked its initial US$2.2 billion bid on concerns the deal was not in the interests of customers.
BBI shares rose as much as 3.5% on Tuesday but closed 2% higher, outperforming a decline in the broader market, with some traders expecting the modified bid to win the support of regulators in the western state of Montana, giving the company a foothold in the U.S. gas and electricty transmission market.
Still, the deal was far from done.
There is still a lot of work to do. This takes it some good steps forward.
It certainly looks a lot better than it did yesterday," Babcock & Brown Infrastructure (BBI) Chief Executive Officer Jeff Kendrew told Reuters on Tuesday.
The new proposal offers US$20 million in refunds to customers in Montana and a commitment to spend at least US$380 million to bolster existing operations in the state.
BBI also proposed to slash the debt component of the purchase by half, to US$250 million, with a corresponding increase in equity.
NorthWestern and BBI would also create a locally managed Montana utility subsidiary with its own board and management.
BBI committed not to sell or transfer its ownership interest in the Montana unit outside of a Babcock & Brown-managed fund for 10 years.
BBI also said the Montana subsidiary will not make distributions in any calendar year in excess of its net earnings.
"We note that BBI has made a commitment to restrict dividends from the utility to net income, which we understood was a key point of contention from BBI's side previously," said Nathan Lead, an analyst with Wilson HTM Investment Group.
"Usually the net income from a utility is quite a lot lower than their actual cash flow," Lead added.
Last month, the Montana Public Service Commission made a preliminary ruling opposing BBI's proposed purchase of NorthWestern.
"The joint applicants, and particularly BBI, have heard the Commission loud and clear," BBI's Kendrew said in a statement.
"They said we did not provide explicit benefits to Montana, made promises that lacked commitments, and did not provide sufficient assurances as to how BBI would make an already good company even better for Montana. We are responding to those concerns promptly and comprehensively," he added.
NorthWestern serves about 628,500 electric and natural gas customers in Montana, South Dakota and Nebraska.
BBI raised A$422.1 million by selling new shares in February to help fund the NorthWestern purchase. But it said that if the transaction does not proceed it could deploy the capital in other deals, which would be equally earnings positive.
In July last year a consortium led by a Macquarie Bank managed fund and Diversified Utility and Energy Trusts bought electric utility Duquesne Light Holdings for US$1.59 billion.
"The deal highlights the political risks faced in dealing with different state-based regulators in the U.S. Given we are unsure whether the proposal will proceed we are maintaining our hold rating on BBI," Lead added.