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Balkanization Powers "Win-Win"
Acquisitions of Electric Cooperatives Cooperatives are enticing acquisition candidates. Located in 47 states and numbering roughly a thousand, domestic electric cooperatives have assets worth $76 billion and serve 36 million people via 2.3 million miles of distribution lines. To put that in perspective, coops own 43 percent of the wires and poles, cover 75 percent of the land mass, and serve 12 percent of the population of this country. Many have desirable service territories, are growing fast, are under-leveraged, have substantial cash flow, and can realize significant cost savings from economies of scale. And, contrary to a widely held misconception, electric coops earn profits. Although there was a flurry of activity in the 80s and early 90s, there have been virtually no acquisition attempts in the last several years. Potential acquirors were instead attracted to independent power production, power trading, and foreign acquisitions, and found such alternatives to be more desirable than acquiring electric cooperatives. With most other avenues to growth effectively closed, I suspect that cooperative acquisitions will be examined anew in many executive suites. And here's the good news (for acquirors, anyway): Literally every cooperative in the country can be acquired. Candidates need not feature negative rate disparities, poor service quality, lack of community involvement, or any of the other factors that are typically cited as making a cooperative "vulnerable." Instead, cooperatives can be acquired because their owners-the customers that the cooperatives serve-have accrued substantial equity in their cooperatives but have no way of monetizing that equity in a timely fashion (if at all) as long as their cooperative retains its inveterate ownership structure. By monetizing that ownership interest, cooperatives can be acquired, and all parties involved (with the likely exception of the coop's board directors) will benefit. Indeed, various factors make electric cooperative acquisitions "win-win" propositions for both the acquirer and the coops' customer/owners. Probably the most compelling is the ability for the acquired entity to enjoy economies of scale, benefiting the acquirer and the newly acquired customers alike. That ability arises in large measure from the incredible balkanization of electric cooperatives. Since they are ultimately controlled by board directors who enjoy their power and perquisites, however modest, most cooperatives are small, insulated, and inefficient. Because various diverse constituencies must be kept whole, concerns of board directors, employees, customer/owners, and even outside attorneys can stymie a merger (I am even aware of a merger that was scuttled just prior to closing because the two boards' of directors could not agree on the name of the merged entity). Although consolidation could address many of their inadequacies, cooperatives seldom merge-and thus cooperatives have never consolidated to any significant degree. As a consequence, electric distribution cooperatives have an average customer density of about 40,000 per coop. If the nation's roughly 240 investor-owned utilities had the same customer density, there would be nearly 2,300 IOUs in the U.S. To put that in perspective, if the coops' average customer density was applied to them, there would be 49 Duke Powers, 52 Detroit Edisons, 121 AEPs, and a staggering 207 ConEdisons (plus a whole host of others). Needless to say, such would be incredibly inefficient-and the cooperatives generally are as well. Indeed, small cooperatives feature administrative and general (A&G) and consumer account expenses per customer/owner that are nearly double those of their larger cousins, and small cooperatives feature distribution costs per customer/owner that are 50 percent or more higher than those of even mid-sized coops (bearing in mind, of course, that smaller cooperatives often feature relatively low customer density, which explains a portion of their higher operating costs). While coops are enticing, potential acquirors must exercise some caution to avoid running headlong into windmills: the tender offer model familiar to potential acquirors is virtually self-defeating in the context of an electric cooperative acquisition. Indeed, I call this self-defeating model the coops' "ultimate takeover defense." Virtually all acquisition attempts have used this model, and most offers have been withdrawn before even reaching the coops' customer/owners. There is a better model, of course, and every electric cooperative in the country can be acquired utilizing it. But potential acquirors must be willing to act outside of their comfort zone to do so. Eventually, a forward-looking firm or two will start the ball rolling-but it will probably be a while (good news for cooperative board directors, but bad news for coop customers/owners). Until then, shopska (a favorite, albeit somewhat unappealing, Balkan dish) for all!
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