A Michigan Mega-Merger: DTE to Buy MCN
In a move creating an entity that will challenge CMS Energy Corp. for
the title of Michigan's largest gas and electric utility, DTE Energy Co.
announced the purchase of MCN Energy Group last week in a cash and stock
transaction valued at $2.6 billion. The combined company will be headquartered
in Detroit and named DTE Energy Co. The merger is expected to be one of
the speediest among utilities, closing in six to nine months.
Including the assumption of MCN's debt, the value of the transaction
is around $4.6 billion. Upon completion, the new DTE will have approximately
11,500 employees, serving 2.1 million electric customers and 1.2 million
natural gas customers in Michigan. It will have an energy portfolio consisting
of more than 11,000 MW of generating capacity, 600 Bcf/year of natural
gas deliveries and 185 Bcf of natural gas storage capacity, with assets
totaling more than $17 billion and annual revenues exceeding $6 billion.
DTE will also gain MCN's 25% interest in the Vector Pipeline project, 10.5%
interest in the Millenium Pipeline project and 23% interest in the Portland
Natural Gas Transmission System Pipeline project.
It's intrastate rival, CMS' Consumer's Energy, has 1.6 million electric
customers and 1.5 million gas customers. Overall, CMS Corp. has annual
sales of about $6 billion and assets of about $14 billion.
DTE, which announced it was in the market to acquire a gas supplier
last Spring (see NGI, May 3), said the synergies
of this combination will position the new company to market coal, gas and
electricity in the region and to compete more effectively in the development
of new power plants and distributed generation. MCN's Michigan Consolidated
Gas (MichCon), a gas utility serving 1.2 million customers in 500 Michigan
communities, and DTE's Detroit Edison, Michigan's largest electric utility
serving 2.1 million customers, will retain their corporate identities and
be operated as subsidiaries of DTE. The two utilities have 775,000 customers
"The transaction is expected to be accretive to DTE's earnings
per share within the first full year of operation and will provide immediate
and meaningful operating synergies by creating economies of scale and by
leveraging the contiguous and overlapping service territories of our two
companies," said Anthony F. Earley, DTE's CEO.
"The [merger] is expected to produce annual cost savings of approximately
$60 million. The combined company will be well positioned to capture the
enormous growth opportunities in the attractive Great Lakes-to-Northeast
corridor, which currently accounts for about half of the nation's total
energy consumption." Most of the savings will come through cutting
overlap in the support services and information systems areas of the new
Earley said the utilities are committed to keeping layoffs to a minimum.
DTE expects a staff reduction in the 500-person range because of the transaction.
While the merger itself did not surprise Mike Heim, an analyst for A.G.
Edwards, the timing of the announcement did. "It's fair to say that
before this merger, MCN was a struggling company. The fact that it was
bought isn't surprising. What is surprising is that this deal was made
so soon after MCN made its new corporate strategy public. They didn't give
that much time to succeed."
The corporate strategy Heim alluded to was announced in early August
(see NGI, Aug. 9). It called for an increased
focus on regional operations and caused the cancellation of some major
asset sales. The change of direction was a main contributor in MCN's $86.2
million net loss for 2Q99. It also was the latest in a string of bad news
for the company which included rogue traders falsifying earnings and disappointing
financial performances due to poor market conditions (see NGI, June 14).
Despite MCN's struggles, Heim said the merger made sense and has a tremendous
upside. "Anytime management moves to increase the company's stock
price over 30%, there must be lots of positive signs. One thing that I
like about this marriage is that it appears to be very clean. By that I
mean there appear to be few regulatory hurdles. The utilities do not have
to file with the Michigan Public Service Commission, and they only have
to sell a few power plants to satisfy the [Department of Justice's] Security
and Exchange Commission (SEC). The ability to close a merger of this size
in six to nine months is attractive."
The merger is basically a defensive move on Detroit Edison's part, said
Curt Launer of Donaldson Lufkin & Jenrette. Given MCN's recent troubles,
there was little doubt that it was going to be bought, most likely by an
electric company. Rather than face additional competition on its own home
turf, Detroit Edison correctly decided it would be better off buying MCN
and determining its own destiny.
In order to satisfy federal requirements, Alfred Glancy, MCN CEO, said
interest in four power plants will have to be sold. Three of them, including
the Midland Cogeneration Venture, are located in Michigan and the other
is in California. Glancy said the sales will be completed before the merger
closes. He estimated the total book value for the assets to be between
$125-$175 million. In addition to the SEC, the utilities also need FERC
and shareholder approval. Cheryl Conway, a spokesperson for MCN, said the
merger will be filed with FERC soon. The union has been unanimously approved
by the boards of both companies.
Under the terms of the agreement, the holder of each share of common
MCN stock can elect to receive either $28.50 in cash/share or 0.775 shares
of DTE Energy common stock per share. DTE intends to continue its dividend
policy of $2.06/share annually, representing a dividend increase per share
to current MCN shareholders of approximately 56.5%.
DTE's offer represents a 60% premium over MCN's Oct. 1 share price.
Early was quick to defend the offer at the press conference. "The
MCN stock is trading at a discount because of some of its write-offs and
issues that they've had to deal with. The [MCN] stock is really a $21 to
$22 stock, rather than a $17 stock. Our due diligence confirmed that and
if you take away the perceptional impact of some of those write-offs, this
stock should be trading in the $21 to $22 range. This is a premium in the
30% range, which is right in the median for a utility transaction like
this." MCN's stock soared after the merger news was released, increasing
over 30% to finish at $23.44. DTE's stock value dropped nearly 10% to finish
Upon completion of the merger, Glancy will retire from MCN and join
the board of directors of DTE, and Earley will serve as chairman, president
and CEO. Joining Earley in the office of the president will be Stephen
E. Ewing, current president and COO of MCN, who will serve as president
and COO of the gas business.