Nicor holders will receive $21.20 in cash and 0.8382 share of AGL for each share they own, the companies said in a statement today. That values Nicor at about $53 a share, a 13 percent premium to yesterday’s share price and 22 percent more than the stock value on Dec. 1, before news of the company’s potential sale was first reported.
The transaction is the biggest for Atlanta-based AGL and the largest among U.S. gas utilities this year, according to data compiled by Bloomberg. Nicor, based in Naperville, hired JPMorgan Chase & Co. a few months ago to auction itself, people with knowledge of the matter said last week.
The price is about 2.24 times Nicor’s book value and “looks like an expensive acquisition,” said Gordon Howald, a Happauge, New York-based analyst for East Shore Partners Inc. who owns no AGL shares and today cut his rating to “neutral.” “That’s usually a harbinger of challenges.”
Under an existing agreement with Georgia utility regulators, AGL can claim half of any savings from combining the two companies, Howald said. The rest would go to customers.
The 22 percent premium, based on the $53 per-share offer using AGL’s 20-day moving average price, compares with a 23 percent average premium for U.S. gas-distribution companies purchased during the past five years, according to data compiled by Bloomberg.
Including about $700 million in assumed debt, AGL is paying 6.8 times profit before interest, taxes depreciation and amortization, compared with a median of 8.68 for seven of the 129 deals announced in the last five years, according to the data.
“It’s tough to say if this is cheap or expensive because we don’t have the strategy for the combined businesses, particularly the regulated side,” said David Parker, a Tampa, Florida-based analyst for Robert W. Baird & Co. who rates Nicor shares “neutral” and owns none. “The regulated side is the dog here, not the tail.”
Benefits of Scale
Standard & Poor’s said it may lower its rating on AGL debt to BBB+, the third-lowest investment grade. Moody’s Investors Service said it has no plans to lower AGL’s Baa1 rating, the third-lowest investment grade.
AGL will be the largest U.S. company by market value to get at least half its revenue from delivering gas, if the purchase is completed, according to data compiled by Bloomberg. The combined company will deliver about 4.7 billion cubic feet of gas a day, about 7.5 percent of total U.S. consumption, based on 2009 figures from the Energy Department.
“There are benefits to that kind of scale, scope and diversification of regulatory and weather risk,” Nicor Chief Executive Officer Russ M. Strobel, 58, said today in an interview.
Nicor’s gas storage may enable expansion of a wholesale business that manages supply for utilities, said AGL CEO John W. Somerhalder II, 53. Somerhalder will serve as CEO, chairman and president of the combined company.
“We’re paying a fair price for a very good company with a very good set of assets,” Somerhalder said today in an interview.
Lighting Lincoln Debates
The combined company will have an enterprise value of $8.6 billion, according to the release. AGL shareholders will own 67 percent and the board will include four Nicor directors. The corporate headquarters will be in Atlanta, with headquarters for the gas-distribution unit in Naperville.
AGL owns Atlanta Gas Light and five other gas utilities with about 2.3 million customers in six U.S. states, according to the company’s website. AGL’s biggest acquisition before today’s announcement was in 2004 when it purchased Bedminster, New Jersey-based NUI Corp., a gas distributor, for $684.6 million including debt.
Nicor’s natural-gas distribution unit has more than 2 million customers in northern Illinois and the Chicago suburbs. One of its predecessor companies provided gas to light one of the debates between future U.S. President Abraham Lincoln and Stephen Douglas in 1858, according to the company’s website.
The takeover is expected to be completed in the second half of 2011 and won’t affect AGL’s per-share earnings in the first full year following the close, the company said. It requires approval from shareholders, Illinois regulators and the Federal Communications Commission.
The purchase includes a $36 million breakup fee if it’s abandoned in the first 45 days and $67 million after that, AGL Chief Financial Officer Andrew Evans said on a conference call today.
Goldman Sachs Group Inc. will finance the $1 billion cash payment to Nicor shareholders and advised AGL on the transaction, the companies said. JPMorgan Chase advised Nicor.
Law firms Dewey & LeBoeuf LLP advised AGL, Latham & Watkins LLP advised Nicor and Sidney Austin LLP advised Nicor’s board.
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