UK giant National Grid last week confirmed it is in talks with KeySpan Corp. to potentially acquire the company in an all-cash deal. However, "there is no certainty that they will lead to any definitive agreement," National Grid said in a statement. "If agreed, any transaction would be on an all cash basis, satisfied wholly from borrowings."
The deal would give National Grid substantial holdings in both gas and power in the northeastern United States, growing a presence it established in the region with three acquisitions in 2000. Some said last week that a deal for KeySpan could be consummated as early as this week, which suggests that competing suitor Consolidated Edison is truly a dark horse.
National Grid, which was formed in 1990 as part of UK electricity privatization, said earlier in February that it will acquire the Rhode Island natural gas business of New England Gas Co. from Southern Union Co. for $575 million and assumed debt of $77 million (see NGI, Feb. 20). The Southern Union transaction and the potential for a deal with KeySpan are indication that the UK utility giant is once again turning its attention to the United States, in a region where colonists from England have trod before.
In September 2000 the company announced a deal to acquire Niagara Mohawk Holdings for $8.9 billion in cash (see NGI, Sept. 11, 2000). That deal was later consummated and it followed National Grid's acquisition of the New England Electric System of Westborough, MA for $4.7 billion in cash and assumed debt and its $1.03 billion cash and assumed debt acquisition of Eastern Utilities Associates of Boston. Both transactions took place in 2000.
The Wall Street Journal reported Friday that National Grid's offer for KeySpan is nearly $7.3 billion ($42/share) plus assumption of about $4.25 billion in debt. The paper said National Grid appears to be in the best position to strike a deal with KeySpan. Consolidated Edison Inc. is another suitor of KeySpan; however, the company had not made a statement as of Friday last week and previously said it would not comment on speculation of talks with KeySpan (see NGI, Feb. 20). The Journal reported that Consolidated Edison has a cash and shares deal for KeySpan on the table.
In a note following KeySpan's Feb. 17 confirmation of acquisition talks, Calyon Securities said its "best guess" at a price for KeySpan (KSE) would be $42/share in a stock-for-stock deal. "We are dubious that KSE would be acquired in an all cash deal," the note said.
"With any potential acquirer's shares likely to weaken following an acquisition offer, the true value received by KSE shareholders will be less than any announced offer price involving the acquirer's shares," Calyon's note said. "Furthermore, utility shares tend to trade at discounts to acquisition terms because of the 12-18 months it can take to consummate a deal."
That would give an all-cash deal, such as National Grid's, for KeySpan an edge over a deal involving shares. And paying cash has been National Grid's style when acquiring other utility assets in the United States.
KeySpan is the largest gas distribution company in the Northeast and the fifth largest in the United States with utilities in New York, Massachusetts and New Hampshire. KeySpan also provides about 25% of New York's electricity. KeySpan also is the largest power generator in New York state. It owns and operates generating plants on Long Island and in New York City and has total capacity of more than 6,600 MW. The company serves about 1.1 million electric customers through a management service agreement with Long Island Power Authority (LIPA), whose transmission and distribution system the company operates. KeySpan also serves about 25% of the power needs of New York City.
Following news that KeySpan was in play Friday, Feb. 17, trading in its shares was briefly halted. After trading resumed the company ended up closing $4.57 higher at $40.75, besting its previous close of $36.18 by a wide margin. KeySpan did not release fourth-quarter earnings last Friday as had been expected; its earnings conference call also was canceled. KeySpan shares closed at $41.41 in heavy trading.
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