Wells Fargo Securities LLC is keeping its "market perform" ratings on both Great Plains Energy Inc. and Westar Energy Inc., but revised EPS estimates and valuation on the companies following the rejection of their planned merger by Kansas regulators.
The decision of the Kansas Corporation Commission on April 19 came as a surprise to Wells Fargo analysts, who pointed out in an April 20 investor note that the deal had political support and "synergy potential" in coming years.
Nor do Wells Fargo analysts expect the deal to be salvaged, noting that the language in the KCC's rejection order "does not offer a path forward."
Representatives for the two companies expressed disappointment at the KCC's unanimous decision.
"Obviously, we are disappointed, but also know that we need to review all the details of the Commission's order before considering next steps," Westar spokeswoman Gina Penzig said. "It is not uncommon to have mergers be denied, only to later have them be reconsidered and completed, but there is no assurance of that. We will keep you informed as we have more details."
Katie McDonald, a spokeswoman for Great Plains subsidiary Kansas City Power & Light Co. said, "We are disappointed with the order from the Kansas Corporation Commission. We are reviewing the order and evaluating our options."
Great Plains shares traded heavily on April 20, in more than four times average volume, but finished the day largely unchanged at $29.55, up 0.14%. Westar shares, however, fell 7.69% to $50.87 in more than 10 times average trading volume.
Wells Fargo still sees Westar as a potential acquisition target by a larger utility with a bigger balance sheet. Potential suitors, however, may be dissuaded by the KCC's comments on capital structure, the analysts said.
Wells Fargo lowered its 12- to 18-month valuation range for Westar to between $52 per share and $53 per share, from a range of $59 per share to $60 per share. The firm is maintaining its EPS estimates for the company of $2.56 for 2017 and $2.58 for 2018.
Meanwhile, the analysts estimate that deal termination will cost Great Plains "north of $700 [million] pre-tax."
"In terms of the ongoing EPS impact, the primary driver will be the share count," the analysts added, noting that they are assuming for Great Plains a buyback of 44.1 million shares that will result in a 2018 average diluted share count of 172 million.
Wells Fargo revised its 12- to 18-month valuation range for Great Plains Energy to between $31 per share and $32 per share, from $30 per share to $32 per share. The bank also raised its 2017 EPS estimate on the company to $1.81 per share from $1.76 but lowered the 2018 estimate to $1.66 per share from $1.85.