OREANDA-NEWS. Iberdrola never made a secret of the fact that it was on the hunt for targets in the United States. Investors in the Spanish utility were bracing for a big and possibly dilutive acquisition. For the moment, Iberdrola is merging its existing US assets with the much smaller, listed UIL. That values the target at \$3 billion.

The price isn't cheap, but the modest cash outlay makes this a relatively low-risk, if not transformational, deal.

Expanding the US business makes sense for Iberdrola. The Spanish market requires little further investment. Its profitability has been dented by recent energy reforms. The United States, meanwhile, remains fragmented with creaking infrastructure.

UIL operates regulated businesses in the same northeast region as Energy East, Iberdrola's existing unit. The company expects the combined entity to grow earnings per share by 10 percent annually through 2019, with potential projects of \$6.9 billion over the next five years.

The clever deal structure doesn't require a capital increase at the parent level or changes to the dividend policy, as feared. UIL shareholders will receive 18.5 percent of the merged US-based Company and about \$600 million in cash. Since the new entity will be listed, it will provide a valuation benchmark for Iberdrola's US assets, including renewable assets and gas storage.

Iberdrola trades at a 16 percent discount to the sum of its parts, according to Goldman Sachs.

That said, Iberdrola is paying about 20 times UIL's 2015 earnings, a premium to the sectors' already-rich US average of 18 times. The absence of cost-savings makes this hard to justify. UIL's chief will head up the new company. And curiously, Iberdrola is buying back gas-distribution assets it sold to UIL in 2010 after branding them "non-strategic." The rationale is that the shale gas boom has boosted demand for more distribution capacity.

Other US targets may have been too big or too expensive, particularly with the strengthening dollar. But by listing its US business, Iberdrola now has a currency to pursue other deals. The Spanish utility has taken baby steps to grow in the United States. They are unlikely to be the last.

Spain's largest utility, Iberdrola, will buy US utility UIL for \$3 billion to create a new listed power and gas company in the United States.

Iberdrola said UIL shareholders will receive one share in the new company for each share they own and an additional cash payment of \$10.50 per share, valuing UIL at \$52.83 a share, or \$3 billion. That's a 25 percent premium to the closing price of Feb.25.

UIL will hold 18.5 percent of the new company, with Iberdrola owning the rest. UIL's current Chief Executive Officer James Torgerson will become the new company's CEO.

The combined company expects to grow earnings per share by 10 percent annually through 2019. It expects to invest \$6.9 billion in regulated infrastructure and capex over the next five years.