Essential Utilities, the Utilities sector company, was revisited by a Wall Street analyst today. Analyst Julien Dumoulin Smith from Jefferies downgraded the rating on the stock to a Hold and gave it a $44.00 price target.
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Julien Dumoulin Smith has given his Hold rating due to a combination of factors surrounding the recent merger announcement between Essential Utilities (WTRG) and American Water Works (AWK). The merger, structured as an all-stock tax-free deal, offers a modest premium which is considered one of the lower premiums for such transactions. This modest premium, combined with the fact that AWK shareholders will own a majority of the new entity, suggests limited immediate upside for WTRG shareholders.
Furthermore, the analyst highlights that the transaction is driven by Essential Utilities’ need to improve its balance sheet and credit metrics by leveraging AWK’s larger platform. Despite the potential benefits of scale, the limited buyer universe for large water and gas combinations and the modest premium offered indicate that a higher bid is unlikely. Additionally, the regulatory approval process is expected to be lengthy, adding uncertainty to the transaction’s completion. These factors contribute to the Hold rating, reflecting a cautious stance on the stock’s near-term potential.
In another report released today, Robert W. Baird also downgraded the stock to a Hold with a $43.00 price target.