Need to grow propels FPL, Entergy merger

In an effort to get a growth story going, FPL Group Inc. and Entergy Corp. said today they will merge to create the nation�s largest electric utility holding company and largest producer of power in a stock-for- stock $27 billion deal, including debt. The combination of the two electric companies is billed as a merger of �equals��no stock price premium for either company was part of the deal. The name of the new company has not been determined.


Ann de Rouffignac
OGJ Online

In an effort to get a growth story going, FPL Group Inc. and Entergy Corp. said today they will merge to create the nation�s largest electric utility holding company and largest producer of power in a stock-for- stock $27 billion deal, including debt.

The combination of the two electric companies is billed as a merger of �equals��no stock price premium for either company was part of the deal. The name of the new company has not been determined.

The resulting energy company will be divided into two basic businesses: regulated utilities and unregulated businesses of power generation, marketing, and trading. The combined company�s growth strategy will be based on core utility operations and growth in wholesale energy markets, primarily in gas and nuclear electric generation.

Under the agreement, each holder of FPL stock will receive one share of the new holding company for each share owned and each share of Entergy stock will be given .585 shares of the new company. The transaction has to be approved by state and federal regulators in a process that could take 15 months.

Expecting no regulatory difficulties, James L. Broadhead, chairman and CEO of FPL said in a conference call that the merger will result in an immediate increase in earnings/share (EPS).

�We expect to grow EPS in excess of 10%,� he said.

Energizing growth
The merged company will be one of the nation�s largest independent power producers with about 10,000 net Mw of unregulated generating capacity. Its prospects for continued growth of are solid since FPL is third on the list of numbers of new gas turbines ordered and Entergy is eighth on that list, says Fred Schultz, analyst with Raymond James & Associates, Houston.

�It�s an old economy story of building hard assets and approaching double digit growth,� he says. �People will be excited.�

Companies in the much ballyhooed �new economy� have shown double and even triple digit growth that investors crave. But with the recent volatility and continued red ink experienced in this sector, some investors have begun to take a new look at hard assets companies.

The problem with the utility sector is growth has been very slow for decades. Depending on which region of the country and whose numbers are being used, electric demand growth varies from as low as 1% to as high as 5%.

Most utility stocks have been trading �sideways� for the last couple of years. They trade at low multiples of the share price to earnings ratio with little or no appreciation over time.

�Utilities want to tell investors that they have a growth rate of 10-20%,� says Jay Lukens, president of Lukens Consulting Group Inc., Houston. �The only way to do that is with a merger and acquisition strategy.�

He says that most utilities are in the same boat because the whole sector has been out of favor with investors. Managers must generate some kind of growth story to jump start the stock price.

Lukens says more mergers will be announced since the view in the industry is that the Public Utility Company Holding Act will be repealed. The regulation is on the books but is �toothless,� he says. Mergers creating new utility holding companies are not unusual now. A decade ago, mergers that would result in a company being subject to PUCHA were nonstarters, he says.

High customer count is also feeding the proposed merger's growth prospects.

FPL owns Florida Power & Light with 3.8 million customers and Entergy has 2.5 million customers in Arkansas, Texas, Louisiana, and Mississippi.

Analysts suggest that the value of these customers is underestimated by most utility investors.

�A cable company values each customer at roughly $4,000 each compared to what appears to be the average value of $1,500 assigned for each utility customer,� says Schultz.

With the exception of Texas, customers are deemed as particularly valuable in these states since there is little movement toward deregulation or opportunities to lose those customers.

�We have a stable base of residential customers that are less likely to switch if given a choice,� says J. Wayne Leonard, CEO of Entergy. �There is no clamor for deregulation in Florida or in Entergy�s territories.�

Industry transition
How the huge regulated utility holding company is regulated by state public utility commissions will be very important to the outcome of this merger from a consumer point of view.

The merger is not necessarily bad for consumers as a lot of rationalization needs to take place in the industry, says Ashok Gupta, senior energy economist at the Natural Resources Defense Council, New York.

�But if there is no competition and regulation is not working well in these states, this could make things worse for consumers,� he says.

But don�t look for any answers any time soon. The industry is in transition and could take 3 to 5 years to sort out, he says.

Matt Smith, partner with Arthur Andersen, Chicago, also sees a long series of mergers yet to come in the electric industry.

�There�s still a long tail left on the electric and gas mergers in the US,� says Smith.

Broadhead admits that in the very near future there will be only a small number of electric utilities left in the US. He says the merger will give the new company the scale, scope, and growth possibilities to be one of those large survivors.

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