Even with all the debt-laden deals in the utilities sector over the past year, Great Plains Energy Inc.’s (NYSE: GXP) $12.1 billion acquisition of Westar Energy Inc. (NYSE: WR) stands out as especially bloated.

And now, the staff members at one of the state regulatory agencies reviewing the deal have argued for its rejection largely on that basis.

The merger agreement between the two Midwestern utilities is at a significant premium to other deals in the sector. The deal’s transaction value to EBITDA (earnings before interest, taxation, depreciation and amortization) ratio is around 12.3x compared to an average of around 10.0x for similar tie-ups.

Consequently, Great Plains’ stock dropped nearly 9% around the time of the deal’s announcement at the end of last May, as investors and analysts alike balked at the company’s rich bid.

Credit raters, in particular, were concerned about Great Plains’ sudden profligacy.

As Moody’s Investors Service observed, the deal’s financing would triple Great Plains’ debt, leaving little financial flexibility, and suggests management and the company’s board “have a higher risk tolerance for leverage than previously considered, which is a long-term credit negative.”

As a result, the two major credit raters, Moody’s and Standard & Poor’s, placed Great Plains’ debt under review for an eventual downgrade, though it would remain investment grade.

Meanwhile, Wall Street has been wondering when the deal would prove accretive to earnings. Great Plains’ own projections show that the acquisition would be neutral to earnings in 2018, but possibly accretive starting in 2019 or 2020.

But it’s possible that it could take even longer for shareholders to see value from the deal. Analysts characterized management’s forecast of $200 million in annual cost-savings as aggressive compared to other similar utility mergers and noted that regulators could decide that any savings should be shared with customers.

Right Target, Wrong Price

Of course, no one quibbles with Great Plains’ choice of Westar, itself. Indeed, prior to Westar putting itself in play earlier this year, Investing Daily’s Utility Forecaster had identified the Kansas-based mid-cap utility as one of the sector’s prime takeover targets.

In addition to a strong financial profile, as evidenced by its high Utility Forecaster Safety Rating, Westar also boasted a steadier earnings-growth profile than Great Plains.

Beyond that, the two utilities operate in adjacent service territories and share ownership of the 1,170 megawatt Wolf Creek nuclear power plant.

Additionally, the regulatory environment in Kansas, where Westar operates, has generally been much more constructive than the regulatory environment in Missouri, where Great Plains primarily operates.

At least, that was the case until it came time for the staff of the Kansas Corporation Commission (KCC) to review the terms of the deal and assess whether the merger would prove beneficial to ratepayers.

In an unusual twist for utility regulators, the KCC seemed to fixate on the deal’s financial risk at least as much as its potential effect on ratepayers.

Late last week, the commission’s staff recommended that commissioners reject the deal because it poses an “unacceptably high financial risk for both current and future customers and shareholders.”

Westar’s shares, which had been trading about 4.4% below the deal price, dropped 2.8% following the announcement, but have since recovered somewhat.

Playing Politics

In most cases, regulators impose conditions on a utility deal to extract more goodies for ratepayers, rather than urge its rejection outright.

But odds are the deal will still ultimately get approved.

The actual commissioners who will vote on the merger are not bound by staff recommendations.

Beyond that, commissioners are ultimately political animals. In this case, all three of the commissioners on the KCC were appointed by Governor Sam Brownback, who supports the merger.

For that reason, one analyst went so far as to declare that there’s a 90% probability that the deal will still close.

Of course, there could be more deal drama along the way, including the potential for some sort of renegotiation to appease regulators.

Money on the Table

Right now, the terms of the cash-and-stock deal offer Westar shareholders $51 per share plus $9 per share worth of Great Plains’ stock, for a total deal price of $60.

On a year-to-date basis, Westar’s share price is up 32.3%, which is about 18.2 percentage points more than the main utility benchmarks.

Westar shareholders who prefer to cash out now, rather than stick around to see what happens next, would be leaving about 6.5 percentage points of capital gains on the table, if they sell at current prices, plus any dividends that are paid between now and the deal’s close.

In the unlikely but possible event that the deal falls apart, Westar shareholders who cash out now could pocket most of the deal’s premium and then potentially reinvest in the stock at a lower price.

But since Westar previously put itself in play before there was any deal, its share price would probably continue to trade at elevated levels even if Great Plains walks away.

As for Utility Forecaster, we continue to rate Westar as a Hold in our wider How They Rate coverage universe, pending the deal’s close.