The nation’s third-largest utility is paying $6.44 billion to create a giant power company serving 11 states, announcing the merger Monday as two other big utility deals were falling apart.
The failures, however, will not slow the wave of electric and gas company mergers as more states move to loosen regulations and let customers choose their own power providers.
“Ultimately, they’re all going to come along. It will be a cascading effect - as one does it another will follow,” said Daniel Scotto, an analyst with Bear Stearns.
In the deal announced Monday, American Electric Power Co. of Columbus, Ohio, will spread into four new states with its planned purchase of Dallas-based Central & South West Corp., whose four electric utilities serve 1.7 million customers in Oklahoma, Texas, Arkansas and Louisiana.
“Our industry is undergoing massive change and restructuring. There’s no indication that things will be easing up any time soon,” said E.R. Brooks, chairman and chief executive of CSW.
Currently, 14 states have firm plans to deregulate their utility industries and others will soon follow, particularly in the Middle Atlantic and Northeast regions, Scotto said.
States such as Arizona, Nevada and Florida that have strong population growth are also likely areas for future utility mergers, said analyst Andrew Levi of Furman Selz.
AEP, through its seven subsidiaries, provides energy to approximately 2.9 million customers in Ohio, Indiana, Michigan, Kentucky, West Virginia, Virginia and Tennessee.
The companies, which also serve 4 million combined customers in England, now begin the lengthy process of convincing regulators they will not harm competition and increase rates - a stumbling block for some big utility marriages.
Baltimore Gas and Electric Co. and Potomac Electric Power Co. on Monday abandoned their $3 billion combination, saying regulators in Maryland and Washington, D.C., wanted to impose conditions that would have offset any financial benefits from the merger.
In May, federal regulators rejected a proposed $6 billion merger of the two largest electric utilities in Minnesota and Wisconsin, maintaining the new company would wield too much control over the electricity market.
Washington Water Power Co. of Spokane and Sierra Pacific Resources of Reno called off a proposed merger in 1996 after federal regulators stalled the deal.
The AEP announcement also came after Western Resources Inc. on Friday scrapped the terms of its $2 billion purchase of Kansas City Power & Light, saying it would try to negotiate a better price. The value of Western’s shares has jumped since the stock swap was announced in February.
These failed deals, however, represent only a small portion of the utility industry’s merger boom over the past few years. Since 1994, $91.9 billion worth of utility deals have been announced, according to Securities Data Co. of Newark, N.J.
The AEP-CSW merger is expected to save $2 billion over 10 years through the elimination of duplicate corporate and administrative tasks and increased purchasing power.
AEP said about 1,300 jobs will be cut from a combined total domestic work force of about 26,000. AEP employs about 18,000 workers; CSW employs more than 8,000. It hopes to minimize layoffs through reduced hiring and attrition.