Last week, The Carlyle Group appeared to sell Mountain Water to Liberty Utilities, surprising the hell out of everybody. A judge ruled in June that Missoula is the rightful owner of Mountain Water. So how could Carlyle sell it to someone else?
One reason might be to establish a market price. If Liberty offered, say, $100 million for Mountain Water, Carlyle could use that offer as evidence to increase the value—and therefore the purchase price—of the utility in court.
But the city of Missoula dropped its appeal of the valuation lawsuit on Jan. 6. The price of Mountain Water is settled at $88.6 million. If Carlyle were looking to establish market value, it would have stopped the sale process after it had a bid—and it almost certainly would have abandoned the sale once the valuation trial was canceled.
It's possible that by selling Mountain Water while its future is still in dispute, Carlyle is handicapping its own lawsuit. If the Montana Supreme Court overturns Judge Townsend's ruling, Missoula will lose its right to buy, and Mountain Water will suddenly be worth whatever anyone is willing to pay for it.
That seems unlikely, but there is at least some chance the Supremes will find for Carlyle, and Carlyle could be selling the likelihood that the condemnation will be overturned. If they think it's lower than Liberty does, they have a deal. For instance, if Carlyle thinks it's 15 percent and Liberty thinks it's 25, then there exists a range of prices where both sides expect value from the sale.
But how is any of this even legal? If the bank forecloses on my house, I can't turn around and sell it to you when I get the letter. And the Montana Public Service Commission must approve the sale of any utility in the state. It didn't approve this.
Liberty has "reserved the right to raise jurisdictional issues" if the PSC challenges the sale. Because it bought Mountain Water's parent company as part of a package that includes two other companies in California, the PSC only has jurisdiction over one part of the deal. And Mountain Water technically still has the same owner; it's the owner's owner that changed. That's the angle Liberty Utilities President Greg Sorenson is taking.
"[It was] an upstream transaction," Sorensen told the Victorville Daily Press last week. "The regulated utility is still owned by the same company it was last week. We just happened to change parent companies."
If that's true, then the city of Missoula still has the right to buy Mountain Water from its parent company, Park Water, for $88.6 million. Liberty just gets the money instead of Carlyle. But that depends on the outcome of Carlyle's Supreme Court case, and on whether the PSC challenges Carlyle's sale to Liberty in court, and on whether Liberty sues to overturn the outcome of either of those lawsuits, since it is now an interested party in both.
And that's the kicker: Missoula will need to pay lawyers to represent its interests in all of those cases. This quagmire is becoming a boondoggle.
According to city staff, the expenses associated with buying Mountain Water now stand at $4 million. That's about 5 percent of the purchase price. At what point does the cost of doing business exceed our willingness to buy? If the answer is never, we are headed down a dangerous path.
The most obvious explanation for Carlyle's bizarre move last week is that it wants to fight a war of attrition. It lost the condemnation trial, and the valuation had run its course. So Carlyle sold Mountain Water's parent company to trigger a series of potential new suits to go along with its Supreme Court appeal.
Carlyle suffers less than we do by dragging out this process. It took in $974 million in 2014. If as little as 4 percent of that came from Mountain Water, Carlyle made more than Missoula spent while the two parties were in court. The multinational private equity firm has more resources than the city of Missoula, and it might just be turning a profit every day it delays the sale.
That is a war we will not win, even though we are in the right. Our legal bill currently amounts to $57 for every man, woman and child in the city. When it hits $100, do we quit? How about $500?
Maybe we never quit. Maybe we only stop suing to buy Mountain Water when the city is broke—when there is no money left in the coffers and no one will loan us any, either. If that's what we're willing to do, Carlyle can take us there. If you don't think they'll do it, consider how many times they have surprised us so far.
Dan Brooks writes about people, politics, culture and legal speculation at combatblog.net