Group that blocked New Mexico utility merger eyes data centers in Blackstone deal

Blackstone Infrastructure's $11.5 billion acquisition of TXNM Energy faces scrutiny from New Energy Economy, the group that previously blocked TXNM's merger with Avangrid. The deciding factor hinges on Blackstone's data center plans in New Mexico and how the costs of electrical system upgrades will be handled, given the surge in electricity demand from AI data centers; TXNM is barred from owning or operating data centers for third parties, implying data center companies would bear the costs of related infrastructure upgrades.

Analysis

Blackstone Infrastructure's (BX.N) proposed $11.5 billion acquisition of electric utility holding company TXNM Energy (TXNM.N) faces significant scrutiny centered on its strategy for data center development in New Mexico. New Energy Economy, the advocacy group that successfully blocked TXNM's previous $8.3 billion merger attempt with Avangrid in late 2023, has indicated that Blackstone's plans for data center ownership and the allocation of costs for necessary electrical system upgrades will be pivotal to their assessment. This heightened attention occurs as U.S. electricity demand is projected to hit record highs, largely driven by the proliferation of AI data centers, which is fueling M&A activity within the power industry. While TXNM's regulated utilities, including PNM in New Mexico, can supply power to these data centers, current state regulations prohibit them from developing, owning, or operating such facilities for third parties. According to a source familiar with the Blackstone-TXNM arrangement, data center companies themselves are expected to cover the expenses for any transmission upgrades or new power generation required. Blackstone and TXNM plan to engage with stakeholders, including New Energy Economy, over the next 90 days before formally filing their proposal with state regulators, a critical phase given the regulatory failure of the prior Avangrid deal.

Key Decisions for Investors

• Investors in TXNM should closely monitor the upcoming 90-day stakeholder engagement period, as its outcome, particularly New Energy Economy's stance on Blackstone's data center plans and cost allocation for grid upgrades, will significantly influence the probability of regulatory approval for the $11.5 billion acquisition.
• Parties evaluating Blackstone or the broader utility sector M&A landscape should assess how this deal addresses the financing of infrastructure to support AI-driven data center growth, as precedents set here regarding cost recovery could impact future investment returns and regulatory frameworks.
• Consider the execution risk associated with Blackstone's ability to navigate New Mexico's regulatory environment and satisfy stakeholder demands concerning data center development; the successful resolution of these points is crucial for the deal's completion and the realization of synergies from increased electricity demand.