Feb. 27 (Bloomberg) -- National Grid Plc, the British owner of electric utilities in New York and Massachusetts, agreed to buy KeySpan Corp. for $7.3 billion in cash, an acquisition that almost doubles its U.S. customers.

The price will be $42 for each KeySpan share, London-based National Grid said today in a statement. That's 16 percent more than the New York-based company's share price on Feb. 16, the day before KeySpan said it was in talks.

Utility mergers this year have climbed sevenfold to about $134 billion from the year-earlier period, according to data compiled by Bloomberg, as companies seek higher profit from the efficiencies of bigger operations. KeySpan has 2.6 million gas customers that will be added to National Grid utilities including the former Niagara Mohawk and Massachusetts Electric.

``It fits in with their strategy,'' said Neil Beddall, a director of credit research at Barclays Capital in London. ``They are focusing on the networks business and that makes a lot of sense. It's the right geographic area.''

National Grid shares fell 3.5 pence to 610 pence today in London. The stock is up 3.7 percent since the day before the first reports of the possible takeover. KeySpan shares fell 65 cents, or 1.6 percent, to $40.76 in New York Stock Exchange composite trading today.

Operating Profit

The acquisition, expected to close early next year, will increase National Grid's U.S. operating profit to more than 50 percent of total operating profit, from about 40 percent now, said Steve Holliday, who will become chief executive officer at the end of the year.

The purchase quadruples National Grid's gas distribution business in the U.S. and will make it the third-biggest power and gas supplier there, he said.

It will also put National Grid into the power-generation business for the first time. KeySpan owns natural-gas fueled plants that can generate 6,650 megawatts, enough power for about 5.3 million U.S. homes.

National Grid sold the power plants of Niagara Mohawk and its New England utilities upon acquiring them. It plans to keep the KeySpan plants and retain the staff that operates them, buys the fuel and markets the power, National Grid's Chief Financial Officer Steve Lucas said in an interview in New York.

Power Generation

``Initially when we started talking to KeySpan, the reaction was that this was nothing to do with our business,'' Lucas said, referring to the power plants. He said he became convinced that, ``on Long Island, the situation is pretty much riskless and is part of a package of supplying energy.''

Most of KeySpan's electricity output is sold through 2013 to the Long Island Power Authority, power supplier for 1.1 million customers on Long Island. LIPA customers pay for any increase in fuel costs under the agreement, KeySpan Chief Executive Officer Robert Catell said.

KeySpan's largest plant, 2,310-megawatt Ravenswood in the borough of Queens, sells power on the New York wholesale market for delivery inside the city, where plants are few and lines delivering power from elsewhere have been difficult to build.

``It's a bit more risk,'' Lucas said. ``It is valuable generation and we are happy to keep it for the foreseeable future.''

Interested Since 2002

Grid began exploring a purchase of KeySpan in 2002 after it entered New York with the purchase of Niagara Mohawk, Lucas and Catell said.

The U.K. company won out over Consolidated Edison Inc., owner of New York City's electric utility, and other bidders, Catell said. The repeal this month of the Public Utility Holding Company Act, which had restricted utility ownership, helped spur interest, Catell said.

``Things really picked up after that,'' Catell said. ``We had been dating since 2002. Things heated up more recently.''

Mergers involving utilities have gathered pace as the industry has refocused on businesses such as power generation and gas after companies including Enron Corp. expanded into areas such as energy trading.

Enron, whose former CEO and chairman are on trial in Houston on charges of fraud and conspiracy, had more than $68 billion in market value before it filed for bankruptcy in December 2001, wiping out thousands of jobs and at least $1 billion in retirement funds almost overnight.

National Grid will also assume $4.5 billion of KeySpan debt and expects savings of $200 million per year, it said today.

Quick Cuts

``Overlap allows you to cut costs pretty quickly,'' Greg Phelps, who oversees $5 billion for John Hancock Advisers in Boston, which owns shares of KeySpan, said before today's announcement. ``The stock has been stuck in the low $30 range without a catalyst for moving higher. As a shareholder, I'd be inclined to vote for the deal.''

National Grid this month also agreed to buy a Rhode Island gas distributor from Southern Union Co. for $498 million.

``Pure coincidence,'' Lucas said. ``Our strategy has long been acquisition in the U.S. We've been looking. We needed willing sellers.''

National Grid has been able to negotiate delivery agreements with U.S. regulators that allow higher profit for longer terms than it's allowed in the U.K., so acquisitions will continue, Lucas said.

Ofgem, the U.K. utility regulator, allows a 6.25 percent return on equity before tax, and rates must be justified every five years, Lucas said. In New York, National Grid slashed rates $152 million and froze them for 10 years, prompting regulators to allow a 10.6 percent return on equity before Niagara Mohawk must begin returning profit to customers, he said. It's allowed 11 percent in Massachusetts.

More Takeovers

Last year, $236 billion of utility industry takeovers were announced, almost double the $122 billion in 2004, according to data compiled by Bloomberg.

Suez SA and Gaz de France SA said today they plan to merge, a combination that would create the world's second-biggest power and gas supplier and fend off a possible hostile bid for Suez by Italy's Enel SpA.

Germany's E.ON AG on Feb. 21 offered to buy Endesa SA of Spain for 29.1 billion euros ($34.6 billion), topping a hostile approach from Gas Natural SDG SA.

In the U.S., FPL Group Inc., Florida's biggest utility owner, agreed in December to buy Constellation Energy Group for about $12 billion to obtain nuclear power plants. Chicago-based Exelon Corp. is buying New Jersey's Public Service Enterprise Group for about $16.7 billion.

``The market for utilities is heating up,'' Barry Abramson, who helps manage $33 billion at Gamco Investors in Rye, New York, said last week. His firm owns shares of KeySpan, Consolidated Edison and National Grid.

KeySpan, formed in 1998 through the merger of Brooklyn Union Gas Co. and parts of Long Island Lighting Co., had sales of $6.65 billion in 2004, about the same as National Grid's revenue in the U.S. last year.

New Customers

KeySpan, the largest gas distributor in the U.S. Northeast, has customers in New York, Massachusetts and New Hampshire and owns a stake in a pipeline. Power plants it owns on Long Island and in New York City make KeySpan the largest electricity generator in the state.

The Long Island power plants were acquired when Long Island Lighting was reorganized by the state because of debts incurred for a nuclear plant that never opened.

National Grid serves about 3.1 million U.S. customers in western and northern New York State, New Hampshire, Massachusetts and Rhode Island. While most get electric service, 540,000 customers in New York State get gas service from the company.

Buying the Rhode Island utility from Southern Union will give National Grid 245,000 gas customers in the state, where it already provides electricity to 477,000 homes and businesses.

To contact the reporters on this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: February 27, 2006 16:49 EST