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The Electric Cooperative
Acquisition Process When a prospective client asks me if a particular coop can be acquired, my advice is "be sure you ask the right question." That advice is based on a solid experiential foundation. In the late '90's, I worked with an investor-owned utility (IOU) that was contemplating a series of electric cooperative acquisitions. The IOU had assembled an impressive team; as a team member, I added my knowledge of electric cooperative acquisitions to the complimentary knowledge of the financiers, accountants, engineers, consultants, and so on. The team, with my input, produced a prodigious number of thick, colorful, data-rich reports concerning proposed acquisition candidates. Large sections of these reports were concerned with analyzing the ability of the IOU to acquire the candidates; the team rhetorically proposed a number of questions, all good, but none on-point. And they consumed the team's time and attention, with no end in sight. While not really my role, I proposed (in a ridiculously long memo) a different "evaluation methodology." The team agreed that I was correct; subsequent clients have universally agreed as well. Here's how it works: An acquiror will usually offer to redeem a coop customer/owner's accrued equity as an inducement to sell the cooperative. According to the National Electric Cooperative Association's web site, the median equity per consumer/owner or "Member" of distribution cooperates which borrow from the Rural Utilities Service was $1,328 for the year 2000 (this is not the correct measure to use when evaluating a candidate, but it will work for our present purposes). So, an offer might be something like "we will pay coop Members their accrued equity; the average payment will be $1,328 per Member." If that amount proves to be inadequate to entice cooperative Members, simply increase it. At some dollar amount (and I'm not talking about ridiculous sums), literally every Member will respond positively -- even those with emotional or other intangible attachments to the coop. Coop Board Directors can employ virtually no traditional takeover defenses due to the cooperative business structure, and their opposition will be noisy but ineffective. Thus, literally any coop can be acquired. That being the case, the correct question is not "Can this coop be acquired?" but, instead, "Can this coop be acquired for a price that the acquiror is willing to pay?" The process of answering that question begins with an "overflight seminar" which I typically present to key decision makers (a version of which I will be presenting in a national web cast on September 9, 2003 at 1:00 PM EDT -- see the announcement below). I've been involved with electric cooperative acquisitions for over a decade, and experience has taught me that very few people outside cooperatives (and sometimes very few of those inside as well) understand much about coop fundamentals. Thus, the seminar covers topics such as coop history, financial structure (including the critical topic of equity belonging to coop consumer/owners), the correct acquisition model, and so forth, concluding with an overview of potential candidates. The next step is to assemble a team (with members typically drawn from the acquiror's staff, augmented by external specialists and investment bankers if needed) with expertise in rates, engineering, finance, accounting, marketing, and other areas. The team determines the maximum cost that the acquiror is willing to incur to acquire any given electric cooperative. This is, of course, a matter of corporate policy; formal policies ("It is the policy of Wireco that acquisitions must produce...") and informal maxims ("We're not going to tell the analysts/PUC/shareholders that...") will guide the analysis. A proforma is created to quantify the financial performance of the cooperative following the acquisition, and a "maximum acquisition cost" will be imputed based on the proforma and the potential acquiror's acquisition policies, leverage, cost of capital, and so forth (and, of course, applicable regulations). Two key tests must then be met. The first test is to insure that the "maximum acquisition cost" equals or exceeds the "minimum acquisition price" of Member equity, long term debt, and acquisition expenses. If the test is not met, the inquiry probably should not proceed (while there are ways to acquire cooperatives for less than this formulaic amount, the acquisition effort will be difficult). If the first test is met, the second test is to determine whether or not the Members of candidate cooperative is amenable to the acquisition at the "maximum acquisition cost;" this inquiry is the province of a market researcher who will use a combination of focus groups and polls. If the proposed acquisition fails to meet the preceding tests, the inquiry stops; the potential acquiror's sunk costs are very modest, and my clients have always felt their money well spent to explore an exciting strategic opportunity. If the proposed acquisition meets the tests, the potential benefits of the acquisition, alternatives to the acquisition, and so forth, can be evaluated and an informed decision can be made. If the decision is made to proceed, the final steps are to prepare and launch the acquisition campaign.
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