After the markets closed this past Friday, Puget Energy announced that its buyout for $30 per share by Puget Holdings was completed. I’ve been following the situation with Puget Energy (PSD) since just before I bought shares of the stock for the Special Situations Real Money Portfolio back on October 22, 2008.
I bought 78 shares of Puget Energy (PSD) for $22.10 per share for a total cost of $1,730.75 back in October. At that time, the only real condition that remained for this buyout was the approval of the Washington Utilities and Transportation Commission. I estimated that this buyout could close in less than 4 weeks. The final reply brief was due to Washington Utilities and Transportation Commission on October 23rd. Nothing since that date indicated any issues. “All federal regulatory and shareholder approvals required for the merger have been obtained. Puget Holdings has committed equity and debt financing in place to complete the merger and to provide significant capital for PSE’s future needs,” noted a press release at the time. This merger arbitrage looked relatively low risk given the potential rewards at that point.
As is often the case with mergers and acquisitions of utilities, things always seem to take longer than anticipated, probably because of the regulatory approvals required by government agencies and the politics involved. The Washington state attorney general’s office opposed the sale of Puget Sound Energy to the group of investors from Canada and Australia. The Public Counsel continued to oppose this deal thoughout the process and was able to delay the decision by filing “new” information to the Washington Utilities and Transportation Commission even after the closing date for comments.
There was also a grassroots movement to block this deal by including referendum on several county election ballots in Washington pushing for the formation of Public Utility Districts (PUDs). These efforts failed to pass in all the counties in November, except the most rural, Jefferson County.
After the elections, I assumed that the acquisition would be approved in short order. However, the Commission meeting before Thanksgiving failed to take up the issue and the deal looked like it could be in trouble, especially given the credit crisis was taking a turn for the worse at that point. Questions about the financing of this deal were starting to worry many.
A member of Contributor’s Corner then noted:
On Dec 12, PSD announced the merger will not be completed this year, but from what I gather, it was only pushed back to mid/late January. Meanwhile, the share price is under $23. The recent drop in the dollar would seem to make this even more of a no brainer. Potential to make 30% in a month, so I am considering adding to my position. What am I missing here?
I too could find no reason for the recent PSD decline at that time. I thought maybe it was just another hedge fund liquidating assets in order to deleverage. I recently discovered that Madoff held shares of PSD, so it is no surprise that PSD shares were being sold as part of the liquidation of those funds. I’m sure other hedge funds hurting for cash were also doing the same.
Finally, on the last day of 2008, Washington State regulators finally approved the acquisition of Puget Energy (PSD). My guess is that this New Year’s Eve announcement was timed to get the least amount of attention from local opponents to this deal. Surprisingly, shares of PSD once again dipped on the lack of news regarding the closing date. There seemed to be an information blackout regarding the closing of the deal and the only news was the announcement on January 6, 2009 that Puget Energy declared a dividend of 25 cents per share of holders on January 21, 2009. Therefore, I assumed correctly that the deal would not close until after January 21st.
Finally, on January 16th, Puget Energy announced that this acquisition would close on February 6th for $30 per share and that a dividend of 0.00278 per share per day for each day after and including January 22nd would be paid. If the deal closed on February 6, as it did, then this dividend would be 0.04448 per share.
I needed cash on Friday for another opportunity, so I ended up selling my shares for $29.95 per share on February 6, 2009. The total proceeds for the 78 shares I held was $2,329.13. My total return for this trade was $598.38 (excluded an upcoming dividend payment of $19.50 on February 15), a 34.6% total return on my initial investment. Since I held this investment for 108 days, my average annualized rate of return for this special situation was 117%.
This was only one of the three fat pitch opportunities realized by the Special Situations Real Money Portfolio last week. I’ll write about the other two shortly, or if you are impatient, you can subscribe to Fat Pitch Financials Contributors Corner to see the full portfolio history of the Special Situations Real Money Portfolio along with my latest trades and research notes.