Miller/Howard Utilities Plus
Attractive Risk-Reward Profile
One of the most conservative investment opportunities in utilities and infrastructure, these local monopolies are typically low-correlated investments that provide cash flow above market averages from dividends plus opportunity for growth of income and principal. We seek attractive risk-adjusted long-term returns.
Demonstrated Expertise in the Industry
With more than 25 years of experience in the industry, the investment team has in-depth understanding of the private market values and other factors that can affect transactions. Since inception, this portfolio has had a 32% takeover rate at an average premium to cost of 46%.
Positioned to Benefit from M&A in the Utility Industry
Deregulation and industry-competitive factors have led utilities to consolidation. Small to midsized gas and electric distribution companies are among the most attractive acquisition candidates. These utilities are largely regulated monopolies, pay dividends, and are solid companies well positioned for consolidation.
Miller/Howard Utilities Plus is a specialty strategy structured to benefit from consolidation and convergence in the utility industry. Focus is on investments in public securities of small and mid-capitalization utility companies that we believe are both undervalued and potentially subject to acquisition. In our view, this is one of the most conservative investment opportunities in utilities and infrastructure. Holdings are typically local monopolies and low-correlated investments that provide opportunity for: 1) above broad market averages cash flow from dividends, 2) growth of income and principal, and 3) additional alpha from a transaction premium. What's more, investors are paid to wait while holding a high-quality portfolio with an attractive yield.
Deregulation and competition within the industry are the drivers behind consolidation of the utility sector. The trend began in 1997, with the repeal of the Public Utility Holding Company Act (PUHCA), which paved the way for nonutility purchasers to participate in acquisition of utility companies. Since that time, many utility acquisitions and mergers have occurred. We believe that the small and midsized gas and electric distribution companies are the most attractive acquisition candidates.
We seek to generate alpha by investing in utility companies that we evaluate as likely takeover candidates and that offer a substantial potential price appreciation based on their projected acquisition value.
The key driver is our evaluation of the potential attractiveness of a particular company to another utility company as an acquisition, and the potential profit we may derive should a transaction occur, based on current market prices. The initial universe begins with broadly defined utility companies that trade on the major exchanges in the United States. We narrow the universe to attractive acquisition candidates that possess meaningful upside potential from their current valuations. We compare all stocks in the universe to a model of private market value based on the numerous transactions that have already been completed in the industry. If we believe a company can be acquired at a premium, we then evaluate the regulatory environment that might enhance or impede a potential deal. We also analyze a company’s strategic fit with potential acquirors, and the problems or burdens that could hinder a deal. We further investigate management’s view of consolidation, and the proportion of shares held by investors who might be congenial to a transaction.
Preference is given to companies with monopoly-like characteristics and recurring revenues, which may be attained through strategic geographic positioning, or market dominance. Attention to the broad utilities sector is most important. We attempt to find stocks that are supported by our general view of the economy within the utility sector, with bottom-up stock selection being of primary importance.
Stocks are held indefinitely in anticipation of a transaction, or may be sold in the event that current market pricing comes into equilibrium with potential private market valuation. In addition, stocks may be sold if management voices a clear antagonism toward a deal, or if company fundamentals deteriorate sufficiently to alter the potential private market value.
Strategy Inception Date: December 1998
Portfolio Manager: MHI Investment Team
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