July 7 (Bloomberg) -- North Carolina is investigating Duke Energy Corp.’s $17.8 billion takeover of Progress Energy Inc. after the company unexpectedly changed its chief executive officer.
“This significant management change within hours after the merger has put the company on credit watch, so we need to get to the bottom of this to make sure we protect consumers,” North Carolina Attorney General Roy Cooper said yesterday in an e-mailed statement.
Three former Progress Energy Inc. board members said they would have voted against the takeover had they known that Duke’s chief executive officer would remain in charge of the combined companies.
Duke announced on July 3 that Bill Johnson, the chairman and CEO of Progress, had resigned and wouldn’t take over as president and CEO of the combined companies as planned. Duke Chairman and CEO James Rogers, who was supposed to be chairman after the merger, was asked by the board to continue as CEO.
“I wouldn’t have voted for the deal,” James Bostic Jr., who served on Progress’s board since 2002, said in a phone interview yesterday. “It was the board’s belief that that Bill Johnson would be able to run the combined companies in a more efficient manner and offer a much stronger return to shareholders.”
Standard & Poor’s
Standard & Poor’s put Duke, the largest U.S. utility owner by market value, on negative credit watch after “the abrupt change in executive leadership.” The surprise decision to change CEOs as its takeover closed was deceitful, according to John H. Mullin, who also served on Progress’s board.
“I do not believe that a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company,” Mullin, a former managing director for investment banker Dillon Read & Co., wrote in a July 5 letter to the Wall Street Journal.
The new Duke board met without Rogers or Johnson and decided on the switch, Rogers said in a July 3 interview. Under terms of the merger, the board is composed of 11 Duke representatives and seven from Progress. Bostic and Mullin were among eight Progress directors who weren’t added to the new board.
North Carolina’s attorney general opened an investigation to determine if Duke Energy lied to regulators or consumers to get merger approval and win a rate increase requested last year, according to the statement from Cooper.
Cooper is concerned that a potential credit downgrade from Standard & Poor’s could lead to higher utility rates and has asked for information from top company officials and directors, the statement said.
“We are evaluating the attorney general’s request and will respond in due course,” Tom Williams, a spokesman for Charlotte, North Carolina-based Duke, said in an e-mail.
The North Carolina Utilities Commission said yesterday that it also will open an investigation into the transaction, according to a state filing. The commission ordered Rogers to appear at a hearing on July 10 to explain the timing of the decision to replace Johnson. Rogers will testify at the meeting, Williams said in an e-mailed statement.
“We do not comment on our board’s deliberations,” Williams, said in a separate e-mail. The company said on July 3 it wouldn’t comment further on Johnson’s resignation, which it has said was done by “mutual agreement.”
Johnson, who signed a non-disparagement agreement with Duke, didn’t respond to a voicemail message left at his North Carolina home.
“There was information that Duke didn’t share with us, and it may have changed the outcome,” Alfred Tollison, another former Progress director, said in a phone interview yesterday. “Duke may have fulfilled the letter of the agreement, but they didn’t fulfill the spirit,” he said, referring to Johnson occupying the CEO position for one day.
The merger was announced in January 2011 and completed on July 2 after receiving state and federal approvals. Progress’s board unanimously recommended that shareholders vote in favor of the deal, according to a July 2011 regulatory filing.
“I don’t really have any idea what would have happened,” said Bostic, a former vice president of Georgia-Pacific LLC. “I expected that Johnson and Rogers were going to work together and they were going to make this a successful merger.”
Mullin’s letter was reported yesterday by the New York Times and Wall Street Journal.
Duke fell 3.4 percent to $66.23 at the close yesterday in New York, the biggest decline since Aug. 10.
Johnson’s appointment as CEO of the new company was “a critical element in the merger deliberations,” Mullin wrote in the letter. “This is the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street.”
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