RWE AG (RWE-FF)/American Water Works (AWK)

The major negative issue in owning the stock is the concern over capital raising in the future. In order to be competitive, the company must raise several billion dollars over the next 3 to 5 years as they beef up the infrastructure. Since the company has a fairly high debt to equity ratio, it will have a more difficult time accessing attractive funding from the debt market. It also doesn’t help that the credit rating agencies have downgraded the company’s unsecured debt in the last year. That leaves the most likely scenario of raising equity capital which would dilute current shareholders. If this is done at the same time that RWE is selling its remaining position, it could have a severe effect on the stock price.

Typically a fragmented environment where there are numerous takeover candidates leads to higher prices as takeover speculation drives multiples to a premium. AWK, however will likely be on the other side of that coin, making purchases of its own. If it becomes too aggressive and investors believe purchases are being made that dilute current investors, it would likely cause further deterioration of the stocks multiple.