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As the market digests an investment fund's $2.8 billion cash offer for El Paso Electric Co., some are emphasizing a cautious approach to the unique transaction.

El Paso Electric announced June 3 that it reached an agreement to be acquired by Infrastructure Investments Fund, an investment vehicle advised by J.P. Morgan Investment Management Inc., for $68.25 per share. The purchase price represents a 17% premium to El Paso Electric's $58.20 closing price on May 31, the last trading prior to the announcement. The offer also represents a 28.6x price-to-earnings multiple, according to El Paso, based on earnings per share for the year ending March 31.

The investor-owned utility's stock closed up more than 13% at $66.08 on heavy trading volume on June 3 but has since retreated.

On June 4, the Williams Capital Group lowered its rating on El Paso's stock to "sell" from "hold" and raised its price target slightly to $54 from $53. The stock closed at $65.72 on June 4.

"Our investment rating change is merely a reflection of the asymmetrical risk reflected in the regulatory approval process to approve the company's sale and the limited upside potential to the take-out price, in our view," Williams Capital Group analyst Christopher Ellinghaus wrote in a research report.

"We would watch the regulatory dockets carefully for any signs of transaction friction with regulators," Ellinghaus added.

The transaction is subject to approval by the New Mexico Public Regulation Commission, the Public Utility Commission of Texas and the Federal Energy Regulatory Commission, as well as the city of El Paso, Texas.

Texas regulators have presented roadblocks for utility mergers involving out-of-state acquirers in recent years but did eventually approve San Diego-headquartered Sempra Energy's acquisition of prized Texas utility Oncor Electric Delivery Co. LLC.

New Mexico regulators also have been tough on utilities when it comes to protecting ratepayers and approving rate cases.

"The New Mexico regulatory environment is challenging to say the least," Ellinghaus wrote. "It may very well be the least shareholder friendly jurisdiction in the country."

Mizuho Securities USA LLC analyst Paul Fremont said the firm believes "the standard for merger agreements is 'No Harm' in Texas and 'Net Benefits to Customers' in New Mexico."

Mizuho on June 4 increased its price target for El Paso Electric to $66.50 from $58 while maintaining a "neutral" rating on the company's stock.

Fremont pointed out that the merger agreement contains certain termination provisions if the merger does not close by June 1, 2020. The termination fees are $170 million for Infrastructure Investments Fund, or IIF, and $85 million for El Paso Electric.

The merger is subject to a three-month extension in order to obtain regulatory approvals. "Further, the transaction may be terminated without penalty if regulators impose a burdensome condition or in the event of a material adverse change in El Paso Electric's financial condition," Fremont wrote.

Under the transaction, El Paso Electric will remain an independently operated, regulated utility headquartered in El Paso, Texas, and its current workforce will remain in place. Also included in the deal: customers will receive $21 million in credits on bills over 36 months.

The Mizuho analyst noted that El Paso also agreed to ring-fencing provisions similar to those accepted as part of Oncor's acquisition by Sempra. The company will take actions necessary to sustain its stand-alone credit ratings and "will not guarantee its parent holding company debt nor pledge any assets, revenues or stock with respect to its parent company borrowings."

El Paso also agreed not to enter into "any inter-company debt transactions with IIF or affiliates unless approved by state regulators."

While the deal includes "significant customer credits," as well as employment guarantees, charitable contributions and community investment commitments "that should make the transaction more likely, there is no guarantee that the regulatory approval process will be successful," Williams analyst Ellinghaus wrote.

Williams Capital Group, however, said it does expect the transaction to be completed
.