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Utilities ETFs in Focus on Oncor Bidding War

Sweta Killa
Asbury Automotive (ABG) shares have started gaining and might continue moving higher in the near term, as indicated by solid earnings estimate revisions.

Bidding for the bankrupt Texas-utility Energy Future Holdings Corp, which indirectly owns 80% of Oncor, continues. Sempra Energy SRE jumped in and reached a last minute deal to acquire the power-transmission unit Oncor for $9.45 billion in cash (see: all the Utilities ETFs here).

This is more than billionaire investor Warren Buffett’s $18.1 billion offer to acquire Oncor made six weeks ago.

Inside The Deal

As per the terms of the deal, Sempra would pay $9.45 billion in cash and finance the deal with a combination of its own debt and equity, third-party equity and an expected $3 billion in investment-grade debt at the reorganized holding company.

The transaction is valued at approximately $18.8 billion, including Oncor's debt of $9.35 billion, and is expected to close in the first half of next year. It is awaiting the approval of the Public Utility Commission of Texas, U.S. Bankruptcy Court of Delaware, Federal Energy Regulatory Commission and the U.S. Department of Justice.

If approved, Sempra is expected to own about 60% of a reorganized Energy Future. The transaction is expected to be accretive to Sempra Energy's earnings beginning in 2018.

Sempra is the fourth bidder for Oncor after a series of bids and rejections over the last few years. The first bidder was Hunt Consolidated, which later on abandoned its bid for the Texas utility. The next suitor was NextEra Energy NEE that made three attempts to buy Oncor for $18 billion but failed to gain approval. After that, Berkshire Hathaway made an offer last month (read: ETFs in Focus After Utilities Q2 Results).

Market Impact

Following the announcement of the deal, shares of SRE climbed 1.6% on the day after reaching a new high of $118.78. This has put the spotlight on utility ETFs that has Sempra Energy in its top 10 holdings. Investors should keep a close eye on the movement of these ETFs over the coming weeks:

Reaves Utilities ETF UTES

This is actively managed ETF that seeks to provide returns through a combination of capital appreciation and income, primarily through investments in utilities stocks. It holds 24 stocks with SRE taking the second spot at 8.2%. Multi-utilities dominate the fund’s portfolio with 44% share while electric utilities take the next spot with 36% share. UTES is unpopular and illiquid with AUM of $15.3 million and average daily volume of 1,000 shares. It charges 95 bps in annual fees and gained 0.5% on the news.

Utilities Select Sector SPDR XLU

With AUM of $7.6 billion, this fund provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. Sempra Energy occupies the eight position in the basket with 4.3% share. Electric utilities take the top spot in terms of sectors at 62.3%, closely followed by multi utilities (33.2%). The product charges 14 bps in annual fees and sees a heavy volume of around 12 million shares on average. XLU added 0.4% on the day and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.

iShares U.S. Utilities ETF IDU

This ETF follows the Dow Jones U.S. Utilities Index, holding 52 stocks in its basket. Sempra Energy is the eight firm accounting for 3.7% share. Electric utilities make up for 58.4%, closely followed by multi utilities (30.2%). The fund has amassed $736.2 million in its asset base and trades in volume of 97,000 shares a day on average. It charges 44 bps and added 0.3% following the deal. IDU has a Zacks ETF Rank #4 with a Medium risk outlook.

Vanguard Utilities ETF VPU

This ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 76 securities in its basket. Here also, Sempra Energy takes the eight spot with 3.3% allocation. About 58% of the portfolio is allocated to electric utilities, closely followed by multi utilities (29.3%). VPU is one of the popular and liquid ETFs with AUM of nearly $2.6 billion and average daily volume of roughly 126,000 shares a day. Expense ratio comes in at 0.10%. The ETF was up 0.3% on the day and has a Zacks ETF Rank #4 with a Medium risk outlook (read: 2 Steady Sector ETFs Amid August's Market Crash).

Fidelity MSCI Utilities Index ETF FUTY

This fund provides exposure to 75 utilities stocks with AUM of $290 million. This is done by tracking the MSCI USA IMI Utilities Index. Sempra Energy makes up for the eight position in the basket with 3.3% share. Here too, electric utilities and multi utilities are the top two sectors with 57.5% and 29.1% share, respectively. The ETF has 0.08% in expense ratio while volume is moderate at 86,000 shares a day. It added 0.4% on the day and has a Zacks ETF Rank #4 with a Medium risk outlook.

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NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
Sempra Energy (SRE) : Free Stock Analysis Report
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
ISHARS-US UTIL (IDU): ETF Research Reports
REAVES UTIL ETF (UTES): ETF Research Reports
FID-UTILITY (FUTY): ETF Research Reports
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