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Direct Energy to Acquire First Choice Power
September 22, 2011
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Direct Energy confirmed this morning that it has agreed to acquire First Choice Power from PNM Resources for $270 million in cash, plus additional working capital.
Direct Energy was first reported as a bidder for First Choice Power by Matters in July (7/8).
First Choice Power has more than 220,000 residential and commercial electricity customer accounts in ERCOT, and pushes Direct Energy's total ERCOT customer count to more than 830,000.
Although Direct Energy did not provide a breakout between residential and commercial customers, Justin Courtney, Senior Vice President of Stephens Inc., a financial services firm which advises REPs on a variety of strategic endeavors, estimated that the First Choice Power customer count is 20% commercial and 80% residential. The book also represents approximately 500,000 Residential Customer Equivalents, Courtney said.
Chad Price, Co-Chair of AEG Affiliated Energy Group's M&A Practice, said the terms appear consistent with recent strong valuations of mass market retail businesses. AEG specializes in energy-related mergers, acquisitions, and venture capital transactions, particularly in the retail sector, among its suite of services.
Price noted that recent M&A transactions involving significant mass market books have exhibited stronger multiples or valuations, "possibly reflecting the capital market's shift of value (and emphasis) from the low margin Commercial and Industrial sector to the mass market retail energy segment, which is where strong brand name and effective marketing can make a bigger difference versus the highly price-sensitive C&I business."
Direct Energy's parent Centrica said that, "[a]s one of the five legacy players in Texas, First Choice Power has a customer base with high brand loyalty."
Direct Energy noted First Choice Power's, "strong position in the largely rural Texas-New Mexico Power territory and [its] growing small commercial customer base."
Furthermore, Direct Energy said that First Choice Power's prepaid plans would reinforce Direct Energy's position in selling prepaid electricity, which as previously reported has been a major focus for Direct Energy in ERCOT. First Choice Power was the first retail electricity company in Texas to enter the smart meter prepaid business.
Regarding prepaid service, Centrica said that the acquisition, "provid[es] access to strategic prepaid partnerships that will help support future growth in this key segment of the market."
The transaction is subject to regulatory approval and is expected to close in November 2011.
Separately, PNM Resources is also exiting from Optim Energy, its competitive wholesale business which it co-owns in ERCOT. To facilitate its exit from Optim Energy, PNM Resources has executed an agreement with ECJV Holdings, LLC, the co-owner of Optim Energy and a subsidiary of Cascade Investment, LLC.
Specifically, ECJV Holdings is making an additional equity investment in Optim Energy that dilutes PNM Resources' interest to 1 percent. PNM Resources will not make any additional investment in Optim Energy, and Optim Energy's debt is non-recourse to PNM Resources. Optim Energy's financial results will not be included in PNM Resources' ongoing earnings after Aug. 31, 2011. No regulatory approvals are required for this transaction.
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