Credit: Shutterstock photoNice Value Grab but Will Take Time; Raising Target Price to $75 (from $73).
Our take: "We think ETR's move to spin/sell the transmission business to ITC is a positive for shareholders, advancing an opportunity to better illustrate the value of this asset within Entergy and provide an efficient vehicle for monetization. We still see a long and likely winding road to get the state and FERC approvals but ultimately see the transaction as accretive in most circumstances even if the rate outcome is not as ideal as ITC might want.
Using simplifying assumptions, we see EPS drag from spinning transmission in 2013 and 2014 of $0.85 and $0.96 (Ex 1), respectively, which would effectively lower our published estimates to $4.91 / $5.59 from $5.76 / $6.54. Based on Friday's closing (2 December) P/E multiple (a $69 price), ETR ex. Transco would be worth approximately $59 / share or $53.50 at a 10% lower P/E multiple assuming ETR was getting paid a premium for transmission."
"The uplift for shareholders from the deal will come through owning 50.1% of ITC that based on our deal adjusted fair value of $79 less a $13.50 special dividend to current ITC owners translates into ~$19 / sh of Transco value, raising fair value of ETR (using Friday's pre-deal P/E multiple) to $79 or $73 if using a 10% P/E multiple discount.
"Further benefit would come through a higher effective dividend yield since ETR stated its planned commitment to holding the dividend at current levels for a post spin yield of 5.6-6.2% based on the $53-59 fair value, which would be a ~80% payout ratio on utility only earnings.
"We think ETR's share price move on Monday (5 December) was fair relative to the value uplift from the proposed transaction and could see a case for some additional gains but, like ITC, given the time and challenges ahead to closing we would be reluctant to give full credit today. We are raising our ETR target to $75 (from $73) which splits the distance on potential net value creation from the transmission deal."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
