MGE Energy, Inc. (NASDAQ:MGEE) is a small vertically integrated electric utility company that is serving the counties around the Madison, Wisconsin metropolitan area. The presence of the state capital and the University of Wisconsin are two organizations that give MGE Energy, Inc. (NASDAQ:MGEE) stability, while the increasing number of technology companies in the area is providing a renewed growth engine. Could this small utility company be a takeover target?
Stability and growth
Madison Gas & Electric is serving an area with two large organizations that are considered by most to be “recession proof.” As the economy takes a downturn more people turn to education to prepare themselves for a career shift. And, for better or worse, the state governments are funded by taxpayers and will continue to be in both good times and bad. Couple this with Dane County’s recognition as the seventh strongest metro economy nationally in a study done by Policom Corp in 2012, and it looks like MGE Energy, Inc. (NASDAQ:MGEE) will continue to have a business that can reward shareholders.
The other avenue that MG&E has for growth is a number of biotech company start-ups in Madison serving the headquarters of the largest electronic medical record company in the country Epic Systems. The University of Wisconsin has been a champion of taking its research and making it into an economic reality. While the federal legislation on healthcare records has helped Epic Systems double in size to over 6,200 employees over the last five years, this increasing use of energy from both the companies and the employees they attract will keep the lights burning bright at MGE Energy, Inc. (NASDAQ:MGEE).
MGE Energy, Inc. (NASDAQ:MGEE) could also benefit from a possible sale of assets by the state of Wisconsin. The most recent Governor’s budget proposes the sale of all state-owned power plants. The majority of the facilities potentially on the chopping block are all within MG&E’s service territory. The assets include facilities that are used to heat and cool the university and state of Wisconsin buildings, including the capitol. These facilities would add to the already stable sources of revenue MGE Energy, Inc. (NASDAQ:MGEE) has
Industry Consolidation
Duke Energy Corp (NYSE:DUK) closed on purchasing Progress Energy last year for $32 billion, and Exelon Corporation (NYSE:EXC) merged with Constellation for $7.9 billion. Both of these large scale deals will shake up the energy industry and give the combined companies more leverage in negotiating prices with suppliers.
More recently, NV Energy, Inc. (NYSE:NVE) was just scooped up by Berkshire Hathaway Inc. (NYSE:BRK.B)’s MidAmerican Energy unit for nearly $10 billion. This bolt-on acquisition fits Buffett’s takeover target description: a good company at a fair price. NV Energy, Inc. (NYSE:NVE) will bring a large regulated electric business into the Berkshire family of companies.
NV Energy, Inc. (NYSE:NVE) serves the Las Vegas area with electricity and natural gas and operates one of the largest renewable fleets in the country. This company is in a prime location to increase its percentage of renewable as well. Nevada boasts a favorable regulatory environment, plenty of sunshine, and cheap desert real-estate. This acquisition will help hedge MidAmerican against fluctuating raw material costs as renewables become a larger portion of its generation fleet.
Berkshire’s strategy
Berkshire Hathaway Inc. (NYSE:BRK.B)’s core business of insurance provides the Oracle of Omaha a huge amount of capital to allocate. Over the past few years, though, the company has also been increasing its earnings so that Buffett must now decide what to do with over $1.2 billion each month.
Buffett has been purchasing capital intensive businesses with large barriers to entry, or as he refers to them, “moats.” These companies include the railroad company Burlington Northern and most recently NV Energy. These capital intensive companies will continue to generate large amounts of income, with a low risk of competition from new entrants. This will solidify Berkshire as a cash flow machine for years to come, even after Buffett eventually leaves the helm.
Foolish bottom line
MGE Energy, Inc. (NASDAQ:MGEE) has been increasing its dividend for the last 37 years and only has a payout ratio of 56%, below the 65% industry average. Sitting at $1.25 billion in market cap, this company is small enough to be a potential takeover target by a larger utility company looking to expand its footprint into a stable market. Until then, Madison Gas & Electric Company can provide stable investors a safe place to park their money and sleep at night.
The article Are Small Utilities Now Targets for Bolt-on Acquisitions? originally appeared on Fool.com and is written by Wes Patoka.
Wes Patoka owns shares of Berkshire Hathaway and Madison Gas & Electric Company. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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