2 Reasons That Hydro One Ltd’s (TSX:H) Failed Acquisition Should Concern Investors

Hydro One Ltd (TSX:H) is a stock that investors may just want to avoid altogether.

| More on:

Hydro One Ltd (TSX:H) stock has been up on news that its deal with Avista Corp was rejected by U.S. regulators. Investors aren’t keen on the deal as it will make the company’s balance sheet worse and believe that Hydro One will be better off without the acquisition.

However, I’m not convinced that it is the right move for the company and if the deal is indeed dead and an appeal can’t revive it, it might be time to consider selling the stock if you own it.

The deal would have meant significant growth for the company

Hydro One is based in Ontario and the purchase of a U.S. operator would give it a strong foothold into a much bigger market with the potential to more easily expand into other states as well. Adding that element of growth into Hydro One’s operations would make it a much more desirable stock over the long term and it would attract more investors.

In the short term, there might be some concerns as to its balance sheet, but there are a lot more positives than negatives that would have come as a result of the deal.

Regulators were concerned about the Ontario government

The deal was rejected amid concerns that Premier Doug Ford and his government would be too involved in Avista’s operations. Given that Ford was able to get the board overthrown despite it being a public company, their concerns are legitimate. Therefore, it wouldn’t be unreasonable to expect that he could interfere in U.S. operations as well.

That should worry investors. If another government sees how troubling the Ontario government is, that’s not a good sign. Hydro One has been used as a political tool and could be in the future as well. It’s a troubling reminder for investors that the stock’s problems go deeper than just an acquisition.

Where does the company go from here?

This is the big question that I’d be asking. After potentially wasting time and money on this deal only for it to fail this late in the game, I’d have some doubts about the company’s management and whether the next deal will be any more successful.

It’s also possible that the company may just stay where it is at and not pursue a big move, which might be even more concerning.

Bottom line

I’d never invest in the government; it’s a wasteful and inefficient organization. And Hydro One is looking more and more like a company that still operates like one. While investors might be relieved at what they perceive to be a bad deal falling through, the bigger picture is much more alarming.

Convincing people that Hydro One is a good buy is going to be very challenging amid these risks, which means returns will be limited. The stock has been struggling and is down year to date even with the help of the recent boost in price.

Although it’s possible the deal could still be salvaged, I wouldn’t hold my breath.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »