Summary On August 24th, Southern Company announced agreement to acquire AGL Resources for $66.00 per share in all cash; AGL Resources trades at 7.2% spread and pays quarterly dividend. At EV of approx. $12 billion, valuation is reasonable for utility with solid growth prospects and may attract competing bid. Regulatory review of transaction will be lengthy, particularly in Illinois, but we believe Southern Co. will ultimately obtain approval and deal will close in Q3 2016. On August 24th, Southern Company (NYSE: SO ) announced that the company entered into a definitive merger agreement to acquire AGL Resources (NYSE: GAS ) for all-cash consideration of $66.00 per share, representing an enterprise value of approximately $12 billion. AGL Resources is largely focused on natural gas distribution through its seven natural gas local distribution utilities serving approximately 4.5 million customers. Within these markets, AGL Resources has been performing very well over the last several quarters. Chairman and CEO John Somerholder attributes the positive performance as follows: The favorability is driven by a number of factors, including higher margin for infrastructure investment programs, customer growth and well-managed operating expenses. Strategically, we’re executing on all fronts with the robust capital investment program we laid out for you at our Analyst Day a few months ago. As such, our targeted five-year EPS growth rate of 6% to 9% remains intact and very achievable. We believe these value drivers are what attracted Southern Co. to the company and that as a wholly owned subsidiary of Southern Co., AGL Resources will deliver long-term EPS growth in excess of 4-5% annually for the combined entity. Southern Co. has made a potentially transformative deal that will be accretive in the first year and help Southern Co. overcome some of its near term challenges it faces in construction delays at the Kemper and Vogtle power projects. (click to enlarge) (Source: Nasdaq.com) (click to enlarge) (Source: Southern Co. Investor Presentation, August 24, 2015) We believe that AGL Resources strong performance in several key markets in both new customer growth and conversions particularly in Georgia, New Jersey and Virginia is a solid indication of the company’s strength and its ability to deliver positive results in retail markets. SA Author Sneha Shah articulates many of AGL’s strengths and the attractive prospects for the company here . The company’s track record over the past four years has been impressive and we expect the performance to continue. (click to enlarge) (Source: AGL Resources, 10-K Filing) Transaction Represents a Fair Valuation for Very Attractive Utility Business At an Enterprise Value of $12 billion, Southern Co. is paying a reasonable price, however we would not be surprised if another bidder emerged to pay closer to $68-70 per share. With $5.4 billion in total revenue and $1.12 billion in EBIT in 2014, Southern Co. is paying 2X Revenue and 10X EBIT for a growing and profitable business serving attractive markets. The combined entity will have the largest projected regulated rate base in the industry and the second largest number of regulated utility customers in the industry. (click to enlarge) (Source: Southern Company Investor Presentation, August 24, 2015) We believe it is quite possible that perhaps Duke Energy (NYSE: DUK ), American Electric Power (NYSE: AEP ) or Dominion Resources (NYSE: D ) would consider making a bid for AGL Resources given the reasonable valuation of the Southern Co. transaction at $66 per share. We believe there are well-financed companies in the industry that are looking to grow through M&A and the strategic rationale for acquiring AGL may appeal to at least one of these companies. In Our View, Regulatory Review will Be Lengthy, But Ultimately the Deal will Be Approved We believe that Southern Co. will be able to successfully finance the transaction through a combination of debt and equity issuances. Additionally, we believe AGL Resources’ shareholders will approve the transaction. In our view, the major hurdle for the transaction until closing will be securing the required regulatory approvals. In addition to approval under Hart-Scott-Rodino, the deal must be approved by the following agencies, among others: 1.) Georgia Public Service Commission; 2.) Illinois Commerce Commission; 3.) New Jersey Board of Public Utilities; 4.) Maryland Public Service Commission; 5.) Virginia State Corporation Commission. We think the that the primary risk associated with completion of the transaction relates to the timely approval from the various local regulatory bodies. In particular for this deal, we believe the Illinois Commerce Commission may present a significant challenge. AGL Resource’s Nicor Gas is the largest natural gas distribution company in Illinois and during the company’s acquisition of Nicor in 2011 faced opposition by the Commission before ultimately receiving an approval with various conditions. According to the Chicago Tribune reporting in 2011 : The ICC is also requiring that consumer gas rates remain fixed for three years and that if saving emerge from the merger, they be returned to Illinois natural gas customers. The new company also must maintain certain jobs, management personnel, training and quality assurance programs and pipeline safety program staff across the Nicor service area for three to five years. Specifically, the order requires that the company keep the same number of full-time (or equivalent) employees and management personnel in corrosion control, technical compliance, locating services, transmission integrity management and distribution integrity management. The commission also is requiring the new company to maintain economic development activity in Illinois and social and charitable giving and to include a representative from Illinois on its board of directors. These restrictions that are attached to the approval are not unusual however they do tend to prolong the regulatory approval process and that may be the case again in the Southern Co. acquisition of AGL Resources. Ultimately, we believe the transaction will be approved by all agencies by Q3 of 2016 and close shortly thereafter. There may be increased volatility in AGL Resources during the regulatory review which may offer investors an additional opportunity to profit. Conclusion Given the broad market sell-off on August 24th when the deal was announced, AGL Resources traded below $60 per share and now still trades at an attractive discount to $66 per share. Currently, there is a 7.2% spread and AGL also pays a quarterly dividend of $0.51 per share. Assuming the deal closes in Q3 2016, this would represent a 10.5% return which we believe is attractive due to the relative safety of the transaction. Disclosure: I am/we are long GAS. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.