Utility Mergers Highlight Industry Trend Two More Major Deals Announced Monday As Industry Giants Look Toward Deregulation
Just look at the names: Houston Industries, NorAm Energy, Delmarva Power & Light, Atlantic Energy. It’s hard to think of utilities as sexy, particularly when compared with marquee names like Disney, Microsoft, General Electric, IBM.
But power companies are merging at a stunning pace, as fast as any industry. Two deals announced Monday punctuate that trend and show utilities are thinking hard about deregulation, and their future.
Electricity provider Houston Industries Inc. announced plans to buy NorAm Energy Corp., the nation’s third-largest natural gas utility, for $2.4 billion. Delmarva Power & Light Co. will merge with Atlantic Energy Co. in a smaller electric-utility deal valuing Atlantic at about $927 million.
The combinations add to the $19.6 billion in 1996 U.S. utility mergers announced as of Sunday, according to Securities Data Co. That figure already surpasses 1995’s $17.9 billion in utility deals.
“Basically, you’re seeing a tremendous step-up here because companies are starting to get nervous,” said Edward J. Tirello Jr., a utility analyst at NatWest Securities Corp. “At the end of the day, the basic concept is to capture as much of the customer’s bill as possible, that’s both electric and gas, and at the same time become as big as possible.”
The furious desire to combine has even brought some hostile deals to utilities, long seen as plodding companies where profits were largely determined by regulated rates and investors were primarily interested in receiving their dividends.
“Market and regulatory forces are changing the industry landscape to a more competitive environment,” Don Jordan, chairman and chief executive of Houston Industries, said in announcing the NorAm acquisition.
Both Houston Industries’ takeover and the Delmarva-Atlantic merger have one thing in common: They are being driven by efforts to deregulate the electric utility industry and provide a choice of electricity suppliers for consumers, with the eventual goal of bringing down rates via competition. Those efforts are moving ahead at the state and federal levels, with some states targeting 1998 for full electric competition.
That means electric-power providers must be competitive to win business, which generally means cost-cutting and job reductions.
Houston Industries said its deal will likely bring job cuts, mostly at the corporate level, but did not provide details. Delmarva and Atlantic intend to eliminate about 400 jobs, or 10 percent of their combined work force.
Delmarva’s merger with Atlantic is more like the prior combinations that have come at such a fast pace. (The $37.5 billion in mergers during 1995 and 1996 so far exceeds the total for the 7 years before that, $36.7 billion.) Such mergers tended to involve electric companies merging with other electric utilities to expand their service areas and become more efficient.
“Together, we create a larger regional platform from which to launch new energy-related products and services throughout the Mid-Atlantic region,” Howard E. Cosgrove, chairman and CEO of Wilmington, Del.-based Delmarva, said in a statement. Atlantic is based in Egg Harbor Township, N.J.
Their merger, a stock swap creating a company in which Delmarva shareholders will own about 57 percent, will result in a utility serving 1 million customers in New Jersey, Delaware, Maryland and Virginia. It will nonetheless rank as a relatively small company.
In the brave new world of power generation and distribution, the term “critical mass” is beginning to emerge. Once deregulation hits, many analysts and executives believe that basic power and basic gas will become low profit-margin businesses. The real money will come from ancillary services, like home security, appliance repair and alliances to provide telecommunications services. Utilities provide a valuable link right into customers’ homes.
“There is a belief that you need to reach a critical mass in order to be able to compete effectively in a lot of these new energy-services businesses. So you need a critical mass of customers,” said utility analyst Barry M. Abramson.
Tirello, the NatWest analyst, figures that size will be a minimum of 2 million customers for smaller utilities and 5 million to 10 million for the big power providers.
That battle for customers helps explain the Houston Industries-NorAm deal, in which Houston Industries will pay $2.4 billion in cash and stock for NorAm and assume $1.4 billion of NorAm debt and preferred stock. Both companies are based in Houston and their service areas overlap somewhat, so the combination gives them a bigger combined customer base and helps locks out competitors by offering both gas and electricity.
“There’s both an offensive and a defense reason to make this acquisition,” Abramson said. Houston Industries and NorAm combined will have 3.6 million customers in six states.
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