Historically speaking, local politicians in Great Plains states like Montana haven't been big fans of Eastern banking interests and the intricate workings of financial capitalism. The Populist movement, which originated in the prairie states in the late 19th century, has often been seen as a revolt inspired by agrarians who were outraged at the loss of control over their economic lives. And so the news last week that a group of Montana mayors has hired Citigroup to help them structure an unsolicited $2.2 billion leveraged buyout of NorthWestern Corp. is passing strange.
The proposed deal provides a neat wrinkle on the old Populist theme. Local governments, enraged this time at the way local businesspeople have unsettled the established order—now have the world's largest financial institution working for them.
There's a long back story here. For much of its history, Montana relied on local utility Montana Power to generate and deliver power. But the management of the regulated utility was seized by a combination of greed, hubris, and madness in the late 1990s. As energy markets deregulated, Montana Power's executives felt that simply collecting monopoly profits wasn't enough. They wanted to become big-time managers in hot new businesses. So, after pushing a deregulation bill through the state legislature, Montana Power's brain trust furiously sold off the energy assets and plunged the proceeds into a fiber-optic network. Voilà! Sleepy Montana Power would become sexy Touch America! As part of the transformation, the company in October 2000 agreed to sell its Montana energy delivery and transmission business, which served about 450,000 Montanans, to NorthWestern Corp., a utility serving eastern South Dakota and Central Nebraska, for about $1 billion. The deal was completed in February 2002.
On the one hand, Montanans were lucky that their utility business got sold to an out-of-state company. Touch America plunged big into telecommunications at exactly the wrong time—right into a massive fiber-optic glut. As documented nicely by CBS, the downfall was textbook. Touch America went bankrupt, its executives were at once enriched and disgraced, and the remnants of its hugely expensive fiber-optic network were sold off for pennies on the dollar. Montanans thus avoided the sad spectacle of seeing the parent company of their rock-solid utility dragged into bankruptcy—for a few years, at least.
NorthWestern Corp.'s managers proved almost as bad at investing as the meatheads at Montana Power. Motivated by a similar impulse to get big and diversify, NorthWestern in the 1990s added about $1 billion in debt to invest in a propane business, an air-conditioning business, and, naturally, "a provider of networked communications solutions." Instead of helping the utility achieve liftoff, the units acted as dead weight. Profits never materialized. A restructuring plan in February 2003 failed to avert a September 2003 bankruptcy filing. When NorthWestern emerged from bankruptcy last November, the common stock was wiped out, and the company was reborn as (largely) a boring old regulated utility business.
Throughout all these machinations, customers of the old Montana Power, and the leaders of the cities that depended on Montana Power for tax revenues and energy, grew increasingly agitated. Regulated utilities are generally very good corporate citizens—after all, their growth is in large part predicated on the growth of the local economy, and as regulated entities they have to be responsive to the public and public agencies. Since utilities have to simultaneously invest for the long term while responding to short-term maintenance needs, they have to remain financially stable—which means they're generally safe investments. But as Montana Power and NorthWestern Corp. were going through their agonies, energy prices rose dramatically, much of Montana's power delivery fell under the control of out-of-staters, NorthWestern missed the deadline for paying property taxes in 2002, and stockholders got wiped out.
Having learned from bitter experience not to trust utility executives they can't control, the administrations of several cities in Montana—Bozeman, Great Falls, Helena, Missoula, and Butte-Silver Bow—banded together in 2004 and formed a nonprofit group, the Montana Public Power Authority. First, MPPA offered to buy the Montana business from NorthWestern in May 2004 for $1.26 billion, while NorthWestern was still in bankruptcy. But MPPA was rebuffed. Montana represented the biggest chunk of NorthWestern's business, and the executives were intent on bringing the entire entity public again.
But as a public company—NorthWestern's stock started trading again in November 2004—it's harder for management to dismiss takeover bids, especially when a premium is offered. So, last week the Montanans essentially offered to buy the whole company and then sell the out-of-state businesses to the nonprofit South Dakota Power Co.
Naturally, NorthWestern's management dissed the offer, concluding that "the informal proposal is not in the best interests of NorthWestern and its stockholders." Of course, given recent history, it's pretty clear that NorthWestern doesn't have much of a sense of what is in its own best interest. And yes, it is generally hubris for elected and appointed officials to think that they can do a better job than professional, profit-motivated managers. And yes, there's probably not a lot of hidden utility managerial talent in the city halls of Bozeman and Missoula.
But the failures at Montana Power and NorthWestern—in governance, in strategy, in financial management, in Business 101—were so comprehensive, and so appalling, that the new regime doesn't have much of a leg to stand on. As Missoula Mayor Mike Kadas put it, "We're concerned about a lot of the monkey business that's occurred over the last 10 years.'' Somebody who was trying to screw up a perfectly good business and screw shareholders would have been hard-pressed to surpass what the folks at Montana Power and NorthWestern Corp. did with no apparent effort.