Barclays: Underweight Great Plains Energy On Merger

Great Plains Energy Incorporated GXP has agreed to acquire Westar Energy Inc WR for $8.6 billion. Barclays’ Daniel Ford downgraded the rating for the company from Equal-Weight to Underweight, while maintaining the price target at $28. The analyst commented that there would be regulatory and financing hurdles associated with closing the merger with Westar.

Great Plains Energy expects the transaction to be neutral to EPS in 2018, and drive long-term EPS growth of 6-8 percent.

Stock Performance

Analyst Daniel Ford said that while the company’s guidance is “defensible,” the regulatory calendar is very crowded and “the high sensitivity to financing costs the transaction employs through a great deal of leverage will cause the stock to underperform the utility group into the close of the transaction.”

Great Plains Energy’s shares could trade to $28. Net of the dividend, this suggests a flattish performance, which compares poorly to the expectation for the overall electric utility group of a 9 percent annual total return, including a 3.8 percent dividend yield, Ford mentioned.

The analyst has an Equal Weight on WR and a price target of $60, assuming the merger closes within 12 months.