American Water to Acquire Essential Utilities in $12.3B All-Stock Deal
The merger will create a U.S. water utility giant with a combined market capitalization of approximately $40 billion, but raises concerns of shareholder dilution for American Water.
American Water Works Company (NYSE: AWK) has agreed to acquire Essential Utilities, Inc. (NYSE: WTRG) in an all-stock transaction valued at approximately $12.3 billion. The deal, announced on Monday, will form a water and wastewater utility behemoth with a combined market capitalization of around $40 billion and an enterprise value of nearly $63 billion.
Under the terms of the agreement, which has been unanimously approved by the boards of both companies, Essential Utilities shareholders will receive 0.305 shares of American Water for each share they own. This represents a premium of about 10% based on the 60-day average of both companies' stock prices. Upon completion of the merger, American Water shareholders will own approximately 69% of the combined company, while Essential Utilities shareholders will hold the remaining 31%.
The all-stock nature of the transaction, however, introduces the prospect of significant shareholder dilution for American Water. While the company projects the deal to be accretive to its earnings per share in the first year after closing, the issuance of new shares to finance the acquisition has created some headwinds for the stock.
"This merger is a strategic move to enhance our scale, expand our geographic footprint, and bolster our capacity for critical infrastructure investments," said M. Susan Hardwick, president and CEO of American Water, in a joint statement. The combined company will serve approximately 4.7 million water and wastewater customers across 17 states, with a total rate base of around $29.3 billion.
The strategic rationale for the merger centers on achieving operational efficiencies, optimizing capital deployment, and enhancing the combined entity's ability to address the nation's pressing water infrastructure needs. American Water has stated that it expects to maintain its long-term earnings per share and dividend growth targets of 7-9% following the acquisition. The company also announced its intention to review strategic alternatives for its non-water and non-wastewater businesses after the merger is finalized.
The transaction is expected to close by the end of the first quarter of 2027, pending shareholder approvals from both companies and clearance from regulatory bodies, including the Hart-Scott-Rodino Act and various public utility commissions. The extended timeline for regulatory approval underscores the complexity and scrutiny involved in a merger of this scale within the highly regulated utilities sector.
Prior to the announcement, American Water had a market capitalization of approximately $27.6 billion, while Essential Utilities was valued at around $11.6 billion. Both companies are major players in the water utility sector, which has been the subject of increasing investor interest due to its defensive characteristics and stable, long-term returns. The sector, however, is also capital-intensive, with continuous investment required to maintain and upgrade aging infrastructure.
The deal comes at a time when the utilities sector is navigating a complex landscape of rising interest rates, inflationary pressures, and an increasing focus on environmental, social, and governance (ESG) factors. The combined company's larger scale and financial resources may provide it with a competitive advantage in securing financing for large-scale projects and navigating the evolving regulatory environment.
Investors will be closely watching the integration process and the combined company's ability to realize the promised synergies and maintain its growth trajectory. The long-term success of the merger will depend on a smooth integration of operations, successful navigation of the regulatory approval process, and the continued ability to deliver reliable service and returns to shareholders.