Safe 11% Annual Return With TECO Energy

By | September 9, 2015

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Summary Emera is buying TECO Energy. The deal will probably close by mid-year 2016. The $2.43 net spread offers a 11% annual return. Deal Target Description TECO Energy (NYSE: TE ) provides electricity and natural gas. Deal Terms On September 4, 2015, Emera ( OTCPK:EMRAF ) and TE announced a definitive deal for Emera to acquire TE for US$27.55 per share in cash. Deal Financing The deal is not conditioned on financing. The buyer is working with JPMorgan (NYSE: JPM ), and the target is working with both Moelis (NYSE: MC ) and Morgan Stanley (NYSE: MS ). Deal Conditions The deal’s closing is subject to TE shareholder approval and standard regulatory approvals, including approval by the New Mexico Public Regulation Commission, the Federal Energy Regulatory Commission/FERC, US antitrust clearance, and the satisfaction of customary closing conditions. Deal Price The deal is priced at a 48% premium to TE’s market price before the news came out on the deal. It is at 11.6x trailing twelve months EBITDA. Deal History In mid-July, TE discussed a sale with potential strategic buyers including Duke (NYSE: DUK ), Entergy (NYSE: ETR ), NextEra (NYSE: NEE ), Southern (NYSE: SO ), Fortis ( OTCPK:FRTSF ), CenterPoint (NYSE: CNP ), Dominion (NYSE: D ), and Iberdrola ( OTCPK:IBDRY ). The TE board and management wanted a price of at least $25 per share. Given the strong price that the company ultimately secured, it is reasonable to assume that there were multiple bidders. Equity Options This is probably best exploited with common stock. However, one alternative is to write February 19, 2016, $25 TE puts which last traded for $0.50 with a bid of $0.40 and an ask of $0.65. These are okay, but not great. If the stock price declines or the volatility increases much from here, these could get increasingly interesting. Conclusion TE offers a reasonable return relative to its risks. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long TE. (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. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law. Scalper1 News

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