It seems history does repeat itself all too often. In the late1990s, a common complaint by utility CEOs was that utility price-to-earnings (P/E) multiples did not take into account whether a com- pany was a pure-play regulated utility, a diversified utility with a merchant subsidiary, or something else. Many say investors at the time just didn’t understand the different business models that were emerging after electric restructuring.
It was not until after the Enron debacle, the California crisis, and the merchant overbuild that investors began to fully understand the risks.
Moreover, as many have observed, stock prices have performed extremely well across the sector for three years running. In fact, utilities continue to outperform the Standard & Poor’s index. To a great degree, over the last few years, the earnings multiples have reflected the true value and risks of each business model.
But that was then. These days, valuation levels again are converging as they did during the 1990s, which is quite a surprise after investors’ previous educational experience.
Laurie Coben, managing director and co-head of the Energy & Power Group, Merrill Lynch, identified this new trend in her presentation at Exnet’s 19th Annual Utility M&A Symposium. “On a relative basis, companies with different strategies are trading at a very little difference in P/E multiple,” Coben said.