By Jacob Sonenshine

Regulated utilities are headed for a new era of growth, given the power that artificial intelligence requires. Look for some smaller providers to receive merger and acquisition offers.

The root of the story is that AI requires hyperscalers -- Microsoft, Oracle, Meta Platforms, Alphabet, Amazon.com -- to build more data centers, which require power. This means utility providers must build new power plants, which they monetize by agreeing with their states to earn a certain rate of return on. As they grow their plants, or what industry folks call their "rate bases," they will grow earnings.

Earnings growth will increase moderately. McKinsey & Company forecasts data center capacity can grow by just over 20% annually through 2030. The total rate base growth for utilities will be much lower than that because a chunk of their rate bases are still in the slower-growing residential businesses.

But data center demand should still drive growth a bit higher for many years to come, especially because plant build-outs will take longer than data center completions. Analysts expect companies on the Utilities Select Sector SPDR Fund to grow earnings per share, in aggregate, by 8.8% annually through 2027, according to FactSet, up from 7% this year.

The whole picture makes M&A in utilities likely, especially because there are about 3,000 electric utility providers in the U.S., according to the Transportation Department. Through the first half of this year, 24 power and utility deals happened, according to PricewaterhouseCoopers, up from 17 in the same period last year. Plenty more are possible, given the number of utilities out there.

More deals could come in the form of mergers or purchase offers from larger utilities because of the potential syngeries. Sure, creating revenue synergies, which is when a combined company uses its scale to create higher revenue than the sum of its parts, may prove difficult because utilities are regulated. States don't want to raise costs for consumers more than they have to. But cost synergies are easier, meaning a combined company could eliminated redundant costs and driver higher profits than the two stand-alone entities could achieve.

That's one of the potential drivers behind more deals, says Gabelli Funds portfolio manager Tim Winter, who expects more "consolation" in the sector.

Winter says utilities could also attract buyers from private equity or infrastructure investment funds. They like the growth potential of the sector. They can't easily achieve synergies, given that they're not utility companies themselves.

Blackstone's infrastructure business agreed in May to buy the currently $6 billion TXNM Energy, owner of Public Service Company of New Mexico, for $61.25 a share in cash, which sent the stock up 7% on the announcement. The stock currently trades at $57, and the two parties are waiting for regulatory approval, with an expected close in the second half of 2026.

The other candidates to receive offers are smaller utilities where buyers can finance a purchase. A bunch that Winter listed as possibilities are AES, Idacorp, Avista, and Portland General Electric, which all have market capitalizations below $10 billion.

Avista, with a $3.1 billion market cap, is interesting. It serves Oregon, Montana, Idaho and Washington, home to hundreds of data centers. It has overlap in Idaho with Idacorp, and with several Washington providers, some of which are privately held.

Analyst expect it to grow its asset base and its earnings per share by almost 8% annually over the coming two years. That's up from 2% last year.

Expect deals -- and stock gains for the smaller names.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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October 23, 2025 16:28 ET (20:28 GMT)

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