Energy Utilities Heat Up as PPL Makes a $7.6 Billion Deal for E.ON AG's U.S. Unit
The acquisition follows several other key deals this year, including the $1.6 billion merger of Mirant (MIR) and RRI Energy (RRI); FirstEnergy's (FE) $4.7 billion acquisition for Allegheny Energy (AYE); and Calpine's (CPN) purchase of 4,500 megawatts of power-generation assets from Pepco Holdings for $1.65 billion.
However, judging by the investor response -- PPL's shares fell 7.7% on the announcement -- the deal is likely to face some tough challenges.
Cleaning Things Up
German-based E.ON is the largest investor-owned utility in the world. However, to achieve this ranking, the company went on an M&A spree that resulted in a huge debt load. Ironically, E.ON is now trying to find ways to raise cash through asset divestitures.
It was back in 2002 that E.ON picked up the two assets that are the subject of PPL's acquisition: Louisville Gas & Electricity Co. and the Kentucky Utilities Co. Together, these operations supply more than 1.2 million customers with 7,600 megawatts of electricity.
For the most part, the plants are based on coal -- as are PPL's. However, this could pose a problem because of possible tightening of climate-control regulations, which could result in higher costs for the industry.
PPL's acquisition will result in a powerhouse, with 20,000 megawatts of electricity and five million customers in the U.S. and U.K. Revenues will come to roughly $10 billion.
But there are definitely some major issues. First of all, the deal will have few cost savings and will not be accretive until 2013.
Next, it is far from certain that PPL will get regulatory approval. The deal will need to get clearance from agencies in Kentucky, Virginia, Tennessee, and the federal government.
Finally, PPL is paying a steep price. After all, it looked like there was a heated auction for the deal, which included companies like Duke Energy (DUK). In fact, PPL will likely need to raise a substantial amount of equity capital to pay for the acquistion. In other words, there will probably to be an overhang on the stock for some time.