Wells Fargo maintained an Outperform rating on Pepco Holdings (NYSE: POM). Comments follow rumors from SparkSpread that claimed it hired advisers for a strategic review. Analyst Neil Kalton said he would not be "altogether surprised if the report proved to be true."

"Chairman & CEO Joe Rigby announced plans to step down from the CEO at yearend 2014 and from the Chairman role in the first half of 2015. In addition, POM has had a difficult time earning near the allowed distribution ROEs in each of the company's jurisdictions (MD, DC, DE and NJ). While there have been signs and evidence of improving relations with the regulators in each of the jurisdictions, the pace of earned ROE improvement has been deliberate at best. Thus, it would not be unreasonable to think that the board of directors might seek to evaluate all options in conjunction with the impending departure of Mr. Rigby," said Kalton.

"Based on today's price action, POM shares are currently trading at a P/E multiple of ~16x our 2015E EPS of $1.43, which is consistent with the Regulated Electric peer group. Notably, shares are trading at ~14x our estimated 2015 ''theoretical'' EPS power of ~$1.65 assuming POM is able to earn a 9.75% distribution ROE in the company's jurisdictions. In terms of potential buyers, there is a long list of strategic and financial parties that could have an interest. Companies with operations adjacent or near to POM's include Exelon (NSYE: EXC), Public Service Enterprise Group (NYSE: PEG) and PPL Corp. (NYSE: PPL) Keep in mind that the regulatory approval process would likely be thorny as POM has four jurisdictions that are considered to be relatively tough which, in
our view, would seem to argue more for a strategic buyer rather than financial," he added.

For an analyst ratings summary and ratings history on Pepco Holdings click here. For more ratings news on Pepco Holdings click here.

Shares of Pepco Holdings closed at $21.85 yesterday.