PPL Corp., owner of Pennsylvania’s second-largest utility, agreed to buy E.ON AG’s power grid in central England for 3.5 billion pounds ($5.6 billion) in cash to triple its customers in the U.K.
The U.S. utility will assume 500 million pounds of debt in its acquisition of Central Networks, the companies said. E.ON is getting a 30 percent premium to the value of the assets assigned by the regulator, said Mark Freshney, an analyst at Credit Suisse Group AG. That’s more than a premium of as much as 25 percent Electricite de France SA got when selling its U.K. grid last year, he said.
PPL, which will own the largest U.K. distribution business by asset value after the deal, beat an offer from billionaire Li Ka-Shing’s Cheung Kong Infrastructure Holdings Ltd., according to two people familiar with the matter. Allentown, Pennsylvania -based PPL’s second purchase of assets from Germany’s largest utility in less than a year adds to the $224 billion of acquisitions in the electricity industry in the past 12 months.
For E.ON, “the price is much better than expected, especially when you consider that it also includes pension obligations,” Bernhard Jeggle, an analyst with Landesbank Baden-Wuerttemberg in Stuttgart who recommends investors hold E.ON. “It’s a big step forwards in their 15 billion-euro ($21 billion) asset sale plan.”
Dusseldorf-based E.ON will realize a gain of about 200 million euros from the deal, Jeggle said. E.ON and PPL expect to close the deal in early April.
PPL rose $1.10, or 4.4 percent, to $26 at 9:49 a.m. in composite trading on the New York Stock Exchange. It’s the largest increase in 21 months for the company, which before today had been the worst performer on the Standard & Poor’s electric utilities index.
E.ON fell 11.5 cents to 23.285 euros in Frankfurt trading as of 3:29 p.m. local time today.
“It looks like the largest expansion we’ve seen of a U.S. power company in the U.K. for some time,” Paul Patterson, a utility analyst at Glenrock Associates LLC, said by phone from New York. “This is a unique situation where PPL clearly seems to have a preference for regulated properties while having an existing footprint in the U.K.”
The owners of U.K. power grids get guaranteed regulated rates from customers.
PPL’s U.K. Unit
PPL already owns a U.K. grid unit with 83,000 kilometers (50,000 miles) of power lines that serve 2.6 million customers in south Wales and southwest England, according to its website. E.ON’s U.K. grid has 133,000 kilometers of power lines that serve more than 5 million customers in central England.
E.ON’s U.K. grid had drawn interest from Cheung Kong Infrastructure, MidAmerican Energy Holdings Co. and PPL in a sale that may fetch about $6 billion, people with knowledge of the talks said last month.
The grid sold at a higher price than valued by Cheung Kong Infrastructure, Victor Li, chairman of the Hong Kong-listed utility, said at a media briefing today. Li didn’t say if Cheung Kong Infrastructure had bid for the asset.
The Hong Kong-listed utility expanded its business in England last year after leading a group to buy Electricite de France SA’s U.K. network for 5.8 billion pounds.
After the transaction is completed, PPL will own the largest distribution network in the U.K. in terms of regulated asset value, the company said in its statement. The deal will add about 10 cents to 15 cents a share to 2011 earnings, according to PPL.
“This transaction significantly improves PPL’s business mix and our business risk profile,” Chief Executive Officer James Miller said in the statement.
Miller has wanted to increase PPL’s earnings from regulated assets. The company said on Feb. 4 it expects reduced profits at its unregulated unit this year as slack demand and low natural gas prices squeeze power margins.
PPL has committed financing of 3.6 billion pounds in place from Bank of America Merrill Lynch and Credit Suisse, the utility said. The financing plan includes a combination of common equity, convertible equity units and debt. PPL expects to complete the equity financing in the second quarter and the debt financing by the year-end, the utility said.
Credit Suisse and Bank of America Merrill Lynch served as financial advisers to PPL. Simpson Thacher & Bartlett LLP served as legal counsel to the utility with assistance from Allen & Overy LLP and Ashurst LLP.
E.ON is selling assets as it seeks to raise 15 billion euros by the end of 2013 to cut debt and fund international expansion. The company agreed to sell its 3.5 percent stake in Russian gas producer OAO Gazprom for 3.4 billion euros as well as an Italian pipeline network in December.
PPL agreed last April to buy two U.S. utilities from E.ON for $6.7 billion as part of an earlier asset sale plan by the German energy company.