Emera (TSX:EMA) and Canadian Utilities (TSX:CU) both closed lower on Tuesday, October 6, after Emera agreed to buy Canadian Utilities in an all-stock deal valued at about $14.3 billion. Emera, the buyer, fell $1.99 to $66.31 as investors digested the large number of new shares it will issue. Canadian Utilities slipped $1.00 to $50.20, because its takeout price is tied to Emera's stock and carried only a thin premium to begin with.

What happened

The three companies announced the agreement early Tuesday morning. Emera will acquire all the shares of Canadian Utilities and its controlling shareholder, ATCO, through a court-approved plan of arrangement. The combined company will keep the Emera name, with its public head office in Halifax and Canadian Utilities' operational headquarters staying in Calgary and Edmonton.

The exchange ratios do the heavy lifting. Holders of Canadian Utilities Class A shares, other than ATCO, will receive 0.755 of an Emera share for each share. Class B holders will get 0.819 of an Emera share.

Based on Emera's Monday close of $68.30, the Class A ratio valued Canadian Utilities at $51.57 a share, just 37 cents above its own Monday close of $51.20. That small cushion disappeared once Emera fell. At Tuesday's closing price, 0.755 of an Emera share was worth about $50.06, and Canadian Utilities finished just above that, at $50.20.

Canadian Utilities had traded higher in the morning, but it gave up those gains as Emera slid.

Why it matters

Because no cash is changing hands, every dollar Emera's stock loses also comes off the value Canadian Utilities holders will receive. The two stocks are now effectively linked until the deal closes.

Emera's decline reflects the scale of the share issuance. Existing Emera shareholders will own about three-fifths of the combined company, with former ATCO and Canadian Utilities holders owning the rest. Buyers that pay with large blocks of new stock often trade lower at first as the market absorbs the extra supply.

Management argues the trade-off is worth it. The deal creates a company with about $72 billion in enterprise value, roughly $45 billion in rate base and about six million customers, with a $32 billion Capital plan through 2030. Florida and Alberta will be its two largest jurisdictions. Emera says the deal should add to adjusted Earnings Per Share in the first full year after closing and expects to keep its investment-grade Credit ratings.

Canadian Utilities Class A holders are expected to see their Dividend income rise by about a fifth once they swap into Emera shares.

"This Merger creates a Canadian Utility and energy infrastructure powerhouse with the scale, financial capacity and expertise to invest in the systems our customers will rely on for decades," Emera chief executive Scott Balfour said.

Approvals and timeline

The path to closing is long. Canadian Utilities needs two-thirds support from both its Class A and Class B shareholders, and Emera needs a simple majority to approve the share issuance. ATCO, which holds the controlling vote in Canadian Utilities, has agreed to back the deal.

Regulators will also weigh in. The list includes the Alberta Utilities Commission, U.S. regulators FERC and the FCC, a CFIUS national security review, Competition Act and Hart-Scott-Rodino antitrust reviews, Mexican and Australian authorities, and the Alberta court.

Special Shareholder meetings are expected in early 2027, with closing targeted for the third or fourth quarter of 2027.

What to watch next

Watch whether Emera's shares stabilize, since that sets the value Canadian Utilities holders will ultimately receive. Any early signals from the Alberta Utilities Commission will also matter.

"By bringing Canadian Utilities and Emera together, we will combine complementary strengths, proven operating expertise and greater financial capacity to invest in the energy infrastructure needed for the future," said Canadian Utilities chief executive Bob Myles.