WaterwarHARTFORD: Eversource Energy, New England’s largest public utility company made an offer on April 5th to purchase the Connecticut Water Service, which it disclosed on Thursday April 19th.

CTWS had previously agreed to be acquired by the SJW Group, [NYSE: SJW, San Jose Water] in an all stock deal at $61.86 per share in March, but the deal is worth $63.70 per share after a rise in SJW shares.

CTWS has said that it has rejected Eversource’s offer, which some investors might consider better. Eversource proposed to acquire all of the outstanding shares of Connecticut Water common stock for $63.50 per share in cash and/or in Eversource common stock at the election of Connecticut Water shareholders.

In the San Jose merger, Eric W. Thornburg would be the CEO and chairman of the combined company. Thornburg was CEO of CWS until last September when he resigned to become CEO of SJW.

Carol Wallace, Chairman of the Connecticut Water Board of Directors, said, "The Connecticut Water Board and management team are committed to acting in the best interests of the Company and our shareholders. Having carefully reviewed the unsolicited acquisition proposal, we continue to believe that Connecticut Water's merger with SJW Group is in the best interest of our shareholders, particularly given the significant growth opportunity that the combined organization will have as a leading pure-play water company.”

CTWS’ rejection statement, indicated that investors have done better in the water company than at Eversource a more diversified utility and that this would be the case for stockholders going forward.

Eversource is the parent company of the Aquarion Water Company, a Connecticut based water utility whose service territory is in close proximity to Connecticut Water’s service territory. Aquarion Water serves nearly 230,000 customers in Connecticut, Massachusetts, and New Hampshire, with approximately 90% located in Connecticut.

On April 1st the Milwaukee based law firm Ademi & O'Reilly, LLP said it was “investigating the Board of Directors of Connecticut Water Service, Inc. for possible breaches of fiduciary duty and other violations of Connecticut law in connection with the sale of Connecticut Water to SJW.”

The firm alleged that “Connecticut Water's long-term financial outlook is improving and yet Connecticut Water shareholders will receive only 1.1375 shares of common stock for each share of Connecticut Water common stock they own, the equivalent of $61.86 per share.”

The firm’s announcement says, “SJW is well aware of Connecticut Water's improving financial metrics and is purchasing Connecticut Water at a substantial discount. The merger agreement unreasonably limits competing bids for Connecticut Water by prohibiting solicitation of any further bids, and imposing a termination penalty should Connecticut Water receive and accept a superior bid.”

“Connecticut Water insiders, their affiliates and other major shareholders own significant voting stock, and will receive millions of dollars as part of change of control arrangements, and therefore can unduly influence a sale of Connecticut Water. Our investigation centers on the conduct of Connecticut Water's Board of Directors, who have unanimously approved the transaction, and whether they are fulfilling their fiduciary duties to all shareholders, and obtaining a fair and reasonable price for Connecticut Water given its current financial condition and prospects.”

In a statement Eversource said it “believes its proposal is a superior alternative to the all-stock transaction proposed in SJW Group’s (NYSE: SJW) agreement announced March 15, 2018 to acquire Connecticut Water. Eversource’s proposal represents a 21% premium to Connecticut Water’s closing share price on March 14, 2018, the day prior to the SJW announcement. Eversource’s proposal also represents a premium of 22% to Connecticut Water’s 20-day volume-weighted average price as of March 14, 2018. In addition, those Connecticut Water shareholders who elect to receive Eversource shares would realize the equivalent of an 81% dividend uplift based on the closing price of Eversource’s shares on April 4, 2018 and the annualized quarterly dividend of $0.2975 per share declared by Connecticut Water on January 18, 2018.”

The company added that it “has attempted to engage privately with Connecticut Water for some time. The company expressed its interest in pursuing an acquisition of Connecticut Water in 2017. On April 5, 2018, Eversource verbally communicated its intent to submit a proposal to David C. Benoit, the Chief Executive Officer of Connecticut Water, and delivered a written proposal the same day. On April 17, 2018, Eversource sent a follow-up communication to Connecticut Water expressing its continued interest in pursuing an acquisition.”

“We believe that our proposal represents a unique opportunity to deliver significant and immediate value to Connecticut Water’s shareholders, customers, employees, and local communities,” said Eversource Chairman, President and Chief Executive Officer Jim Judge. “As such, we were surprised and disappointed that Connecticut Water’s Board of Directors has been unwilling to engage in discussions with us. We urge the Board of Connecticut Water to act in the best interests of its shareholders by meeting with us to seriously discuss our compelling proposal.”

The San Jose Water offer would tie together two companies on opposite coasts of the US, while Eversource says it would “combine two highly complementary local businesses, and would enable cost-effective regional investment and support economic growth.”

“The proposed transaction would provide Connecticut Water customers with the benefit of premier service quality and a highly reliable water supply into the future,” said Aquarion President and Chief Executive Officer Charles Firlotte. “The combined company would have a complementary service territory and would allow for an expansion of the superior customer service our employees proudly provide.”

It is unlikely that Eversource which would have a greater ability to control costs in the acquired asets is likely to give up easily on its offer, it has retained Goldman Sachs as its financial advisor and Ropes & Gray as its legal advisor on this matter.

Either purchase of Connecticut Water would require the approval of Connecticut regulators.

Eversource included reference to the regulatory issues in its letter of interest to the CTWS, saying, “Eversource has consistently demonstrated credibility, expertise, and responsiveness in its proceedings before the Connecticut Public Utilities Regulatory Authority (“CT PURA”) and has a strong track record for successful regulatory outcomes. In particular, Eversource has considerable experience in obtaining regulatory approvals required for utility mergers and acquisitions. This is evidenced through our recent acquisition of Aquarion Water Company (“Aquarion”), for which we obtained regulatory approvals in four states and completed the transaction within five months from the regulatory filing date and within six months from the announcement of the transaction.”

Eversource apparently also will be playing the local card with regulators should CTWS continue to dismiss it soffer. Eversource said in it's offering letter in what could be seen as the “promise or threat category", In the final decision issued by CT PURA approving the Aquarion acquisition, attributes of the transaction that were cited as particularly beneficial to customers and employees included local ownership, financial stability, employee benefits and community support. In fact, Eversource is uniquely positioned to create substantial benefits for customers served by Connecticut Water, while preserving local ownership and accountability.”