PPL Corp. agreed to buy E.ON AG’s U.S. power and natural gas unit for $6.7 billion in cash as the owner of Pennsylvania’s second-largest utility seeks growth outside its home state.
PPL will also assume about $925 million of debt in the “transformational” deal, the company said in a statement yesterday. The sale means Dusseldorf, Germany-based E.ON has surpassed a goal of raising at least 10 billion euros ($13.3 billion) selling assets by the end of 2010, the utility said.
Allentown, Pennsylvania-based PPL said the acquisition may boost its ability to access capital as it will benefit from the “constructive” regulatory framework of Kentucky, home to the E.ON unit. The German energy supplier raising cash to slash borrowings after it snapped up power plants and customers from Spain to Siberia as local energy markets began to open.
“The sale price comes as a positive surprise,” Bernhard Jeggle, a Landesbank Baden-Wuerttemberg analyst who rates E.ON “buy,” wrote in a note today. “This contributes to resolve uncertainties associated with that program” of asset sales.
E.ON rose 0.9 percent to 27.97 euros at 9:37 a.m. in Frankfurt today.
PPL dropped $2.13, or 7.7 percent, to $25.60 in New York Stock Exchange composite trading yesterday, the biggest drop since Auguest. PPL has fallen 21 percent this year.
The transaction will close at the end of this year. The purchase will reduce PPL’s earnings in 2011 and begin adding to earnings by 2013, it said. The acquisition includes the Louisville Gas & Electricity Co. and the Kentucky Utilities Co., delivers power to about 900,000 customers and gas to 318,000 customers. It can generate more than 8,000 megawatts of power.
The German utility said the sale will reduce adjusted earnings before interest and tax will by about 400 million euros in 2010 and adjusted net income by about 260 million euros. That doesn’t affect the company’s outlook on a pro forma basis, according to E.ON’s statement.
Jeggle, the Landesbank Baden-Wuerttemberg analyst, said he had expected the asset could fetch about 4 billion euros and that he’ll probably raise his target price on E.ON stock by as much as 90 cents from 30 euros a share.
To help fund the purchase, PPL may sell some “non-core assets.” The company said the deal will provide $450 million in tax benefits.
With the purchase, PPL is “adding scale, creating a much stronger and more diversified enterprise while providing additional opportunities for regulated business growth and, importantly, retaining the upside benefits of our competitive fleet when wholesale power market prices improve,” PPL Chief Executive Officer James Miller said in the company’s statement.
PPL owns or controls about 12,000 megawatts of generation, of which 34 percent is coal-fired and 18 percent is nuclear. PPL has 1.4 million Pennsylvania customers and owns a network that distributes electricity to 2.6 million U.K. customers.
“E.ON U.S. no longer provided us with much room for further strategic development,” E.ON CEO Wulf Bernotat said in the statement. “With PPL as new owner our employees in Kentucky gain a new and strong partner for the future. E.ON on the other hand wins more clarity in our portfolio and valuable room for organic growth.”
The German utility raised almost 6 billion euros selling high-voltage power lines, about 20 percent of its electricity generation capacity in Germany and a holding company for stakes in local energy suppliers, according to a March 10 presentation. E.ON’s net debt was 44.67 billion euros as of Dec. 31.
Last month, Public Service Enterprise Group Inc. Chief Executive Officer Ralph Izzo said that uncertain environmental regulation may limit acquisitions. Public Service owns New Jersey’s largest utility.
Legislation approved by the U.S. House last year would curb greenhouse gases and charge certain industries for permits to emit them.
“We’re going to try to keep an open mind about this, but really preferred PPL as a standalone company, at least until there’s more clarity on carbon regulation,” Phil Adams, a credit analyst with Gimme Credit in Chicago, wrote yesterday in a report to clients.
Moody’s Investors Service downgraded PPL Corp.’s long-term unsecured issuer rating to Baa3 from Baa2 after the announcement.
E.ON acquired the U.S. assets when it bought U.K. electricity producer PowerGen Plc in 2002. PowerGen agreed to buy LG&E Energy Corp. for $5.4 billion in 2000. The German company also has 1,720 megawatts of wind turbines in the U.S. managed by its renewable-energy unit, according to its 2009 annual report. LG&E was originally formed in 1838 as Louisville Gas & Water to provide gas-fired street lighting.
In February, FirstEnergy Corp. agreed to buy Allegheny Energy for about $4.7 billion to increase generation capacity in PJM Interconnection LLC, the largest electricity market in the U.S., which stretches from Washington to Chicago.
“With the bigger balance sheet and more asset base, you can take on bigger projects that smaller and medium utilities cannot do,” said Steve Mitnick, a partner at Oliver Wyman in New York who advises power and utility companies. “That’s a real advantage.”
Blackstone Group LP and Goldman Sachs Group Inc. are advising E.ON on the transaction. Credit Suisse Group AG and Bank of America Corp. advised PPL on the transaction. Bank of America is providing a bridge loan to PPL. Simpson Thacher & Bartlett LLP was PPL’s legal adviser.