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Duke CEO Switch Probe Shows Pain Inside Progress Merger

Duke Energy Corp. (DUK)’s ousted Chief Executive Officer Bill Johnson offered rare insight into the strains that can occur in multibillion-dollar takeovers in testimony at a hearing before North Carolina regulators yesterday.

“They had buyer’s remorse,” Johnson said of Duke’s $17.8 billion takeover of Progress Energy Inc. “They wanted the merger, then they didn’t want it, then they couldn’t get out of it, then they didn’t want to be stuck with me as the person who dragged them to it.”

Johnson, who had been CEO of Progress, said he was blindsided when the Duke-led board threw him out only hours after the merger closed July 2 and replaced him with Duke CEO James Rogers, who had been slated to become executive chairman. Johnson claimed he lost his job because he insisted on completing the merger after Rogers wanted to back out.

Johnson contradicted the version of events Rogers gave July 10 during testimony to the state’s regulators. Rogers portrayed Johnson as an autocratic leader who lost the Duke board’s confidence because of concerns over his management ability at Progress.

During the six months leading up to closing the deal, Johnson said he relied solely on Rogers to communicate with the Duke board. He said his own efforts to meet with the board were rebuffed.

Emotional Testimony

Johnson became emotional during his testimony when describing his abrupt exit and inability to thank and say goodbye to Progress employees. On the day the long-fought deal closed, Johnson said he had donned a new tie given him by his wife for the occasion and met with senior management and Rogers.

That afternoon, Rogers told him “‘We have to go to the 4:30 board meeting, we can’t be late for your election,” Johnson said. “I’m elected CEO, handshakes, pats on the back, congratulations all around. Two hours later, I’m gone. I had no idea.”

The North Carolina Utilities Commission and Attorney General Roy Cooper are investigating the Duke board’s surprise decision because the 2011 merger agreement it approved had stipulated Johnson would lead the combined company. Cooper, a Democrat, is investigating whether state laws were broken, while the commission could rescind its June 29 approval. Florida regulators have asked Rogers to testify Aug. 13 about how a crippled reactor figured into the CEO switch.

Growing Distrust

Johnson testified yesterday that distrust between the companies became so great this year that Progress hired outside litigation counsel to ensure Duke didn’t back out of the deal.

Duke told Wall Street analysts the company would be better off without Progress and prepared them for the idea that the merger might fall through, Johnson said.

Rogers attacked Johnson’s management of its nuclear fleet and considered whether structural damage at its Florida Crystal River reactor might constitute a “material adverse event” that would allow them to cancel the takeover, Johnson said.

Rogers “explored every avenue to get out of the merger,” Johnson said. “We were having to drag them every step of the way.”

Other utility mergers have had to overcome internal tensions, and some have fallen apart as the result of executive conflicts. FPL Group Inc., now called NextEra Energy Inc. (NEE), canceled a $15.8 billion buyout of New Orleans-based Entergy Corp. (ETR) in 2001 after executives disagreed over who would lead the combined company.

Juicy Details

“In the recent wave of merger activity, we haven’t gotten an in-depth look at the personalities and negotiations that have gone on behind the scenes,” said Travis Miller, a Chicago-based analyst at Morningstar Inc. (MORN) “This set of hearings is unique in that it aired a lot of details that investors might not have otherwise known from standard regulatory filings.”

Duke supported the merger, Tom Williams, a Duke spokesman told reporters in Raleigh, North Carolina, yesterday.

“We were contractually obligated to do so and the fact is, we got the merger done,” Williams said. Rogers’ message to Wall Street analysts was, “We’re well-positioned either way,” Williams said.

Duke’s stock has fallen 5.2 percent since the deal closed July 2. Standard & Poor’s placed it on rating watch negative. Duke rose 0.2 percent to $66.22 at the close in New York.

State regulators are unlikely to withdraw their approval of the merger, said Hugh Wynne, a New York-based analyst for Sanford C. Bernstein & Co.

Duke’s Compliance

“The fact that Duke closed the deal despite their intense reservations is a reflection of the how tight the merger agreement was and the desire of Duke’s board to comply with their obligations under it,” said Wynne, who owns shares of Duke and rates the company “market perform.”

If the merger approval was rescinded, Duke might be forced to divest Progress, Christopher Ayers, a partner at Poyner Spruill LLP that represents companies in front of the commission, said in a telephone interview yesterday.

“That’s the only way I see them splitting,” he said. “It’s such an unknown, nothing has ever happened that’s anywhere near this in the utility world.”

Rather than unwind the deal, the commission might impose additional regulatory conditions on Duke, such as a requirement to notify the NCUC if the board discusses management changes, Ayers said.

Fraying Relationship

Johnson testified his personal relationship with Rogers frayed in December when the Duke CEO gave an interview suggesting the company paid a lower price for Progress by promising Johnson the top job.

Tensions flared between the companies over costs associated with the transaction after the U.S. Federal Energy Regulatory Commission issued new demands to resolve its concerns that the combined company would have too much pricing power, he said.

Johnson said he remained committed to the deal and fought Duke’s attempts to back out.

“We signed a merger agreement, we came up here and swore we were going to do it,” he said. “It was in the best interests of everybody, including the Progress customers, shareholders and employees.”

Duke directors E. Marie McKee and James Hyler Jr., both formerly of Progress, testified in support of Johnson yesterday.

Duke’s lead director, Ann Maynard Gray, said today that the company’s board lost confidence in Johnson after he delayed access to the company’s nuclear insurer and provided inadequate information about its damaged Crystal River reactor. Duke director Michael Browning also testified.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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