Jan. 10 (Bloomberg) -- Duke Energy Corp. will buy Progress Energy Inc. for $13.7 billion in stock, creating the largest U.S. utility and increasing its ability to build new power plants to meet future greenhouse-gas emissions limits.
Holders of Progress Energy will get 2.6125 shares of Duke for each of their shares, the companies said today in a statement. The purchase values Raleigh, North Carolina-based Progress at $46.48 a share, 3.9 percent more than its Jan. 7 closing price, the companies said.
Duke, based in Charlotte, North Carolina, will assume about $12.2 billion in Progress Energy debt. The purchase would add power plants that operate near Duke’s service territories in North Carolina and South Carolina, as well as Progress’s Florida subsidiary. The company would serve about 7.1 million customers in six states.
Together, the companies will be better able to afford investments in new power plants, including nuclear reactors, to reduce carbon-dioxide emissions, William Johnson, chief executive officer of Progress, said in a phone interview. With some plant retirements expected, “we’re going to have to replace those with something and of course nuclear is an option that is more feasible for a company this size.”
Johnson, 57, will lead the utility, replacing CEO Jim Rogers, 63, who will become the executive chairman, advising Johnson and serving as the company’s lead spokesman on energy policy.
Rogers said he will be “focused on long-term strategic planning, focused on new technologies that are evolving, and how we can get them in our business model.”
Rogers has been a leading voice for the power sector in the U.S. climate legislation debate, supporting efforts last year for a federal cap-and-trade law that would also protect the financial interests of utilities.
Acquisitions in the U.S. power industry have picked up as companies seek to add to their customer base. Utilities expanding through mergers can spread the cost of complying with environmental regulations or building new power plants across more customers. Regulators generally allow utilities to bill consumers for reimbursement of those costs.
This is the largest acquisition by Duke, which bought Cinergy, a Midwestern utility, for $10.5 billion in 2006. Duke lost a bidding contest last year for E.ON AG’s Kentucky power units to PPL Corp.
The 3.9 percent premium Duke is paying for Progress is less than the 17 percent average premium paid for U.S. electric utilities during the last two years, according to data compiled by Bloomberg. Duke is paying 8.6 times earnings before interest, taxes, depreciation and amortization, which is the average for utility purchases.
Duke fell 21 cents, or 1.2 percent, to $17.58 at 4:01 p.m. in New York Stock Exchange composite trading. Progress fell 73 cents, or 1.6 percent, to $43.99, the biggest decline in three months.
“It’s not a very sexy merger,” said Gregory Phelps, who manages more than $4 billion at MFC Global Investment Management US LLC in Boston, including Duke and Progress shares. “It makes sense from both companies’ perspectives.”
Because Duke’s shares fell, “since Progress is now tied to Duke’s stock price, you’re going to have a pullback in Progress as well,” said Paul Franzen, an analyst at Edward Jones in St. Louis who has a “hold” rating on Duke and Progress shares and owns none.
Dominion Resources Inc., the Richmond, Virginia-based utility, made takeover overtures last week to both Duke and Progress in a last-ditch effort to prevent them from agreeing to merge, said three people with knowledge of the matter.
Dominion offered as much as a 15 market premium for each company, and said it wasn’t interested in a hostile pursuit, said one of the people, who spoke on condition of anonymity because the talks are private. Dominion doesn’t plan to try to break up the Duke-Progress deal, the person added.
CNBC reported the Dominion offers earlier today. Bill Hall, a spokesman for Richmond, Virginia-based Dominion, declined to comment, as did Progress’s Mike Hughes and Tom Williams of Duke.
Duke and Progress chose not to delay the pursuit of their merger, in part because it wasn’t clear whether a combination with Dominion could offer significant cost savings or whether it could win the approval of regulators, said two of the people.
Johnson said shareholders will benefit from improved credit and cost savings associated with running neighboring power plants more efficiently. Fuel and dispatch savings are expected to be $600 million to $800 million over the next four to five years, Rogers said.
The merger requires shareholder approval and federal antitrust review. Additionally, the companies need permission from the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the North Carolina Utilities Commission and the South Carolina Public Service Commission.
Progress shareholders “only get a 4 percent premium and depending on how shareholders feel that might not be the easiest approval to secure,” said Travis Miller, a Chicago-based utility analyst for Morningstar Inc., who rates Progress at three stars out of five and doesn’t own the shares.
The companies also will report on the merger to regulators in Florida, Indiana, Kentucky and Ohio. There will be an undetermined number of job cuts which the company will try to handle through early retirements and attrition, Rogers said.
The companies anticipate clearing federal and state regulatory hurdles without any forced divestitures, Rogers said, and complete the transaction by the end of the year. It’s expected to add to Duke’s earnings in the first year after closing.
Duke supplies energy to about 4 million utility customers in North Carolina, South Carolina, Indiana, Ohio and Kentucky, according to its website. It has about 35,000 megawatts of electric generation capacity.
Progress, created from the merger of Carolina Power & Light and Florida Power in November 2000, has about 3.1 million utility customers and more than 22,000 megawatts of power generation capacity, according to its website.
The new company would surpass Exelon Corp., American Electric Power Co. and Southern Co. in the number of customers it serves.
J.P. Morgan served as lead financial adviser to Duke, and both it and Bank of America Merrill Lynch provided a fairness opinion. Lazard Freres served as lead financial adviser to Progress and provided a fairness opinion. Barclays Plc also advised Progress.
Wachtell, Lipton, Rosen & Katz served as legal counsel for Duke. Hunton & Williams LLP served as legal counsel for Progress.
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