Iberdrola calls off $8.3bn acquisition of US power utility PNM Resources

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Spanish renewables group Iberdrola has called off its planned $8bn acquisition of PNM Resources, cancelling a deal that would have transformed its Avangrid subsidiary into one of the biggest companies in the US utilities sector.

Avangrid said on Tuesday that it was exercising a right to terminate the deal because it had been rejected by one regulator in New Mexico in 2021 and the company was bogged down in appealing against the decision in the courts.

Scrapping the agreement will force a rethink of Iberdrola’s plans in the US, where the transaction would have made Avangrid the third-biggest renewable energy company in the country. The Spanish group has a presence in more than a dozen countries but has made the US its principal investment target.

Two years ago New Mexico’s Public Regulation Commission rejected the $8.3bn deal, which includes $4bn in PNM debt, partly because of concerns over “quality of service issues” at Avangrid.

It also cited the fact that Ignacio Galán, Iberdrola’s chair, had been under criminal investigation as part of a probe into ties between Spanish companies and a former police officer involved in a series of high-profile scandals. A Spanish court closed the investigation into Galán in June 2022 and the company has denied any wrongdoing.

The PNM deal had been approved by five federal agencies and Texas’s public utility commission, the other regulators with a say on the transaction.

Avangrid had appealed against the New Mexico decision, but on Tuesday the company said: “With the close of 2023 there is still no clear timing on the resolution of the court review of the New Mexico regulator’s denial of the merger nor any subsequent regulatory actions.”

It said the terms of the deal allowed both parties to terminate the transaction “if the merger had not yet been consummated” by December 31 2023.

Abe Silverman, who previously worked at the Federal Energy Regulatory Commission, said that utility commissions were “increasingly prioritising local control over their utilities over merger benefits”.

“The perceived trade off is that utility commissions lose control when large multinational utilities take over the local utility and that their ability to address things like service quality decreases. For years, utility commissions regularly signed off on mergers so long as there were customer savings. But increasingly, there’s a sense that those mergers exacted a toll on local consumers that goes beyond dollars and cents,” Silverman said.

“[Iberdrola’s cancellation] is certainly going to cause potential foreign investors to sit up and more seriously evaluate state regulatory requirements,” he added.

Goldman Sachs analysts said Iberdrola’s decision was a “strategic positive” for the company, partly owing to questions about whether it was paying too much given that interest rates had soared since late 2020 when the deal was announced.

Although the transaction was agreed during depressed market conditions amid the pandemic, the $8.3bn price tag equated to 17 times PNM’s forecast 2024 earnings, a relatively high valuation by sector standards.

Goldman analysts said that terminating the merger would prevent a €9bn increase in Iberdrola’s net debt, which would have taken the total to about €55bn had the deal been completed.

In Iberdrola’s 2023-25 strategic plan, the US was due to receive 47 per cent of the company’s global investments in both power grids and renewable energy production, including the cost of the PNM acquisition and €2bn it planned to invest in the business.

Despite the cancellation, Avangrid said it remained “steadfast” in its commitment to New Mexico and the US as a whole and would continue to work on a series of other multibillion-dollar investments.

These include a $2bn investment in clean energy transmission in New York, upgrading more than $5bn of existing wind power assets using incentives in the US Inflation Reduction Act, and new projects including Vineyard Wind, the country’s first large-scale offshore wind project.

Iberdrola shares were flat in afternoon trading at €11.87.