BY ANTONY CURRIE

What makes Connecticut Water Service so tantalizing? The staid Nutmeg State utility has been the unlikely subject of a months-long, four-way, governance-challenged bidding war. And on Monday it, and original suitor SJW Group, unveiled an amended deal that has the buyer now paying, at almost $850 million, a one-third premium for the business. That’s an impressive victory for the seller in an industry whose returns are usually capped by regulators at around 10 percent.

The new price may well flush away rival bidder Eversource, which had baulked at paying more than some $775 million. But SJW is also throwing out a merger-of-equals structure and going for an outright acquisition, in cash.

Diverting to this route obviates the requirement that SJW’s investors vote on the deal, which in turn effectively ices its own stalker. Rival California Water Services had offered $1.4 billion in cash for SJW and was lobbying the company’s shareholders to vote against the New England transaction.

Withdrawing the owners’ say is not the first governance issue the deal has faced. The most obvious is that SJW’s boss since last fall, Eric Thornburg, had spent the previous decade in charge of Connecticut Water – and is still a large shareholder. Monday’s changes, if cemented, will leave him almost $3 million better off compared to the original deal. He recused himself from discussions.

But SJW shareholders are now stuck with a transaction that yields a return on invested capital of barely more than 4 percent. That’s based on the consensus 2019 EBITDA estimate for Connecticut Water and a 21 percent tax rate. The weighted average cost of capital for the industry is around 5 percent.

It only makes sense financially if the new company can take advantage of its increased scale. That takes two forms: first, bulking up for needed infrastructure investments, including striking better deals for costs; second, preparing for a wave of water M&A in a fragmented industry parched for capital. The prospect of being in a better position for both is why gulping down Connecticut Water comes with a hefty price tag.

First published Aug. 6, 2018

IMAGE: REUTERS/Brian Snyder