Why AES Stock Is Soaring Today

Key Points

• Media reports say BlackRock wants to buy utility company AES.

• The reported buyout valuation is $38 billion including debt -- and could be even more.

• 10 stocks we like better than The AES Corporation ›

The AES Corporation (NYSE: AES) stock surged Wednesday morning on reports a unit of private equity powerhouse BlackRock (NYSE: BLK) intends to acquire the electricity utility -- and pay $38 billion for the privilege.

AES stock rose 13.7% through 9:50 a.m. ET on the news, and BlackRock stock fell 1.5%.

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Image source: Getty Images.

What we know about the BlackRock buyout

Media accounts say BlackRock wants to own AES to capitalize on rising demand for electric power to fuel artificial intelligence data centers. AES is a logical target, seeing as the company announced in July it's open to "strategic alternatives" to remaining an independent, publicly traded stock.

AES won't come cheap, however.

Although valued under $11 billion in market capitalization -- even after today's share price spike -- AES carries a boatload of debt, about $29.5 billion net of cash. Acquiring AES at today's price would actually cost BlackRock's subsidiary (Global Infrastructure Partners is named as the acquirer) more than $40 billion, including assumed debt.

Is AES stock a buy?

So we know why BlackRock might want to own AES. We know how much it will probably have to pay to own it. But is this a good deal for BlackRock?

I'm not so sure it is.

Assuming the reports are true -- and BlackRock hasn't yet said they are -- the acquirer would be paying $40.2 billion in enterprise value for a company that earned less than $1 billion over the last 12 months (so a debt-adjusted P/E ratio of more than 40) and that burned through $2.6 billion in negative free cash flow (so a price-to-free-cash-flow ratio of infinity).

Call me a cheapskate, but "infinity times FCF" seems a high price to own AES. I say let BlackRock go ahead and buy AES -- because I don't want to.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends BlackRock. The Motley Fool has a disclosure policy.