By Nell Mackenzie
LONDON (Reuters) - Shares in Essential Utilities Inc rose on Wednesday, shrugging off a report from short seller Spruce Point which issued a "strong sell" opinion on the stock.
The Spruce Point report questioned why the water company diversified its business with a leveraged mergers and acquisition deal to purchase Peoples, a natural gas distribution company.
Travis Miller, an energy and utilities strategist for Morningstar Research, said the share price movements on Wednesday may not reflect the report's negative view on the stock as he believed the company's investors would likely look beyond the report.
"The typical investor in this stock will have a long-term view on it and won't be interested in any particular report written by an investment fund which has a short-term goal in mind," he told Reuters.
Essential Utilities in 2018 agreed to acquire privately owned natural gas utility Peoples in an all-cash deal worth $4.3 billion inclusive of debt. Spruce Point calculated that the water company had paid 15x and 12x of 2018 and 2019 adjusted EBITDA and added $1.9 billion of incremental debt to its balance sheet, adding that the natural gas arm was falling behind in its growth plan while its customers were having difficulty paying bills.
"In Spruce Point’s experience, when public companies buy assets from private equity, it rarely ends well for shareholders," said Spruce Point in a report.
The short seller also said that the company was "unique among its water and gas utility peers in that it reports book overdrafts (a current liability), or cash it owes to fund payments."
Essential Utilities said, it believed the Spruce Point report was misleading.
"Spruce Point Capital is a hedge fund known for launching negative campaigns against companies after taking a short position in the company’s stock," a company spokesperson told Reuters via email.
Essential Utilities shares have risen, at 1603 GMT, 3% since market open on March 8, the day of the report, although they have fallen more than 12% since the start of the year.