Iberdrola calls off $8.3bn acquisition of US power utility PNM Resources

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Spanish renewable energy group Iberdrola canceled its planned $8 billion acquisition of PNM Resources, canceling a deal that would have transformed its subsidiary Avangrid into one of the largest companies in the U.S. public services sector.

Avangrid said on Tuesday that it was exercising its right to terminate the agreement because it had been rejected by a regulator in New Mexico in 2021 and the company was stalled in appealing the decision in court.

Scrapping the agreement will force Iberdrola to rethink its strategy plans in the United States, where the transaction would have made Avangrid the third largest renewable energy company in the country. The Spanish group has a presence in more than a dozen countries but has the United States as its main investment objective.

Two years ago, the New Mexico Public Regulation Commission rejected the $8.3 billion deal, which includes $4 billion in PNM debt, in part because of concerns about “quality of service issues” at Avangrid.

He also cited the fact that Ignacio Galán, IberdrolaThe president had been under criminal investigation as part of an investigation into links between Spanish companies and a former police officer involved in a series of high-profile scandals. A Spanish court closed the investigation into Galán in June 2022 and the company has denied any wrongdoing.

The PNM deal had been approved by five federal agencies and the Texas public utility commission, and the other regulators had a say in the transaction.

Avangrid had appealed against the New Mexico decision, but on Tuesday the company said: “With the close of 2023 there is still no clear time for the resolution of the judicial review of the denial of the merger by the New Mexico regulator nor no subsequent regulatory action. "

It said the terms of the agreement allowed both parties to terminate the transaction "if the merger had not yet been consummated" by December 31, 2023.

Abe Silverman, who previously worked at the Federal Energy Regulatory Commission, said utility commissions were "increasingly prioritizing local control over their utilities over the benefits of merger."

“The perceived disadvantage is that public service commissions lose control when large multinational companies take over the local company and that their ability to address issues such as quality of service decreases. For years, public utility commissions periodically approved mergers as long as there were savings for customers. But there is a growing sense that those mergers took a toll on local consumers that goes beyond dollars and cents,” Silverman said.

“[Iberdrola’s cancellation] "This will undoubtedly make potential foreign investors take notice and more seriously evaluate state regulatory requirements," he added.

Analysts at Goldman Sachs said Iberdrola's decision was a "strategic positive" for the company, in part because of questions about whether it was paying too much given that interest rates had skyrocketed since late 2020, when the agreement.

Although the transaction was agreed during depressed market conditions amid the coronavirus pandemic, the $8.3 billion price tag was equivalent to 17 times PNM's forecast 2024 earnings, a relatively high valuation by industry standards.

Goldman analysts said ending the merger would avoid a €9 billion increase in Iberdrola's net debt, which would have brought the total to about €55 billion if the deal had been completed.

In Iberdrola's 2023-25 ​​strategic plan, the United States was to receive 47 percent of the company's global investments in both electrical networks and renewable energy production, including the cost of the acquisition of PNM and the 2 billion of euros that he planned to invest in the business.

Despite the cancellation, Avangrid said it remained “steadfast” in its commitment to New Mexico and the United States as a whole and would continue to work on a number of other multibillion-dollar investments.

These include a $2 billion investment in clean energy transmission in New York, upgrading more than $5 billion of existing wind energy assets using incentives from the U.S. Inflation Reduction Act, and new projects, including Vineyard Wind, the country's first large-scale offshore wind project.

Iberdrola shares remained stable at 11.87 euros.