NextEra and Dominion Are About to Become the World's Largest Electric Utility. Here's What Investors Should Do Next.

NextEra Energy (NYSE: NEE) is the world's largest utility, with a market cap of $180 billion. It is getting even bigger, now that it has agreed to merge with Dominion Energy (NYSE: D), which has a market cap of nearly $60 billion. The company is basically leaning into what is expected to be a multi-decade period of elevated electricity demand. Here's what you should do.

The outline of the NextEra/Dominion merger

While billed as a merger, it is really a larger NextEra buying smaller Dominion Energy. After the massive utility transaction is complete, NextEra shareholders will own roughly 75% of the combined entity, with former Dominion shareholders owning the rest. NextEra Energy's CEO, John Ketchum, will remain in that role. Dominion's CEO, Robert Blue, will oversee the company's regulated utility operations.

Image source: Getty Images.

Shareholders of Dominion will receive 0.8138 shares of NextEra Energy for every share of Dominion Energy they own. There will also be a one-time cash payment of $360 million, which will be "distributed equally across all outstanding Dominion Energy shares." Notably, NextEra's dividend and dividend policy will not change, which should please income investors who own the stock.

The combined entity is expected to have an enterprise value of $420 billion and a combined market cap of around $250 billion. Already the largest utility in the world, NextEra Energy is extending its lead as it reaches more aggressively beyond the state of Florida. It will now have regulated utility businesses in Virginia, North Carolina, and South Carolina. The acquisition will also add Dominion Energy's contract power operations to NextEra Energy's large, clean-energy-focused NextEra Energy Resources business.

The logic behind the deal is pretty simple. Between 2005 and 2025, electricity demand increased by 10%. Between 2025 and 2045, demand is projected to increase 60%. That's a step change in electricity demand, driven by power-hungry data centers, artificial intelligence, and electric vehicles, among other factors. From a high-level view, investors on both sides of the transaction should probably be pleased with the deal.

The merger will take some time to get approved

NextEra Energy believes it will take 12 to 18 months for the merger to get all of the approvals it needs. Every state the two companies serve will have a say, along with Federal regulators. Given the size of NextEra Energy's business, there is a risk that the merger may not receive the regulatory approvals it needs. However, it seems more likely that regulators would just make aggressive demands as they look to protect customers in their states. That's not surprising.

Following the merger announcement, Dominion stock jumped about 10%, while NextEra Energy's stock fell slightly. That's completely normal and shouldn't be a long-term issue for investors, noting that NextEra Energy's growth rate is expected to increase slightly following the close of the deal. Its regulated operations will also increase from 70% of the business to 80%, thereby making the company's growth more reliable. And the addition of three new states in the mix helps diversification, noting that one of those states (Virginia) is an important global data center market.

Investors should probably hold tight

When you add up all the benefits, most investors should probably continue to hold their Dominion and/or NextEra shares and simply wait for the merger process to play out. You could book a quick profit in Dominion, given the modest stock boost from the deal, but you'd be giving up what is likely to be years of growth ahead from the combined company. NextEra Energy investors, meanwhile, have no obvious reason to sell unless faster growth and a more diversified business are somehow upsetting to them.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.