Southeast Merger Creates Largest U.S. Utility
Florida-based FPL Group Inc., the largest power company in one of the
fastest growing states, agreed last week to buy New Orleans-based Entergy
Corp. for $13.9 billion in stock and assumed debt to form the largest utility
in the United States. When the deal is done, the new company will serve
6.3 million customers and have a combined generating capacity of more than
The merger, approved by both companies' boards, is expected to be completed
in about 15 months. The combined company will have a value of $27 billion,
with $16.4 billion in stock market capitalization and $10.7 billion in
debt and preferred stock. FPL Group shareholders will own 57% of the new
company, and Entergy shareholders will own 43%.
FPL owns power plants in Maine and Florida, and has windmill generators
in Texas. Entergy owns electric utilities in Arkansas, Louisiana, Mississippi
and Texas, along with projects in Europe, South America and Australia.
Entergy also has been buying nuclear plants along the East Coast of the
"This is a fine match," said Deutsche Banc Alex Brown analyst
Edward Tirello. "The earnings outlook of 10% growth beginning in 2002
(when the merger is expected to be finalized) is excellent, and I like
the fact that there will be 48,000 MW. There's also going to be a huge
excess cash flow from this, which will help their growth plans. It looks
pretty good." He said there was no downside to the merger from what
each were bringing to the table, and he was high on what the new Entergy
team will bring to FPL. "Entergy has exceptionally good management,
and FPL will benefit from that," he said.
FPL CEO James Broadhead will chair the new company, while Entergy CEO
Edwin Lupberger, who came aboard in 1998, will be the new CEO. Broadhead
has said recently that he may retire in about two years.
The combined company will become one of the largest independent power
producers in the country, with nearly 10,000 MW of unregulated generating
capacity. Through Entergy's pending venture with Koch Industries (see NGI,
May 1), the new company will be one of the
largest U.S. marketers of both natural gas and electric power, owning 10,000
miles of strategic natural gas pipeline assets. It also will become a market
leader in weather derivatives.
The merger could prompt Entergy and Koch Industries, with whom it has
a business venture, to carry out an expansion of Koch Gateway's pipeline
system into the Florida market, the merger partners said.
Entergy has been on the rebound in the past two years, selling billions
in mostly foreign assets and investing most of that money into new businesses.
It sold London Electricity PLC for $2.9 billion in 1999, and also bought
two New York Power Authority nuclear plants in 1999 for $967 million. Entergy
became the first utility to buy a U.S. nuclear plant when it purchased
the Pilgrim facility in Massachusetts for $80 million. It owns five nuclear
plants, and has indicated it wants to buy more. Last year, it had revenue
of $8.8 billion and net income of $613.9 million.
FPL has remained mostly a regional utility, but it is gaining customers
faster than most because of its location in Florida. The company owns energy
operations from Maine to California, but most of its revenues come from
its utility subsidiary Florida Power & Light, which generates more
than 18,000 MW of electricity from oil, gas and nuclear power. It currently
sells electricity to 3.8 million customers in Miami and along Florida's
eastern coast and the southern part of the state. Subsidiary FPL Group
Capital funds its nonutility holdings.
FPL Energy manages the unregulated energy businesses, with projects
that generate more than 3,000 MW in 13 U.S. states and Colombia. It also
wholesales natural gas, oil and electric power. FPL also is now the largest
U.S. producer of wind electricity. In July, it agreed to build and operate
242 wind turbines in western Texas for TXU Corp.
Last year, FPL bought some plants in Maine for $845 million (see NGI,
March 15, 1999). It also is spending $225
million to expand fiber optic networks along transmission rights of way.
It had sales of $6.4 billion and net income of $712 million last year.
The merger is expected to grow the natural gas and electricity trading
business that Entergy has created, including deals with Koch Industries
Inc. and The Shaw Group. The Koch Industries venture, announced in April,
will have more than $6 billion in annual revenue and $1 billion assets.
The Shaw Group wholesale power market deal will provide management, engineering,
procurement, construction and commissioning services to build electric
power plants (see NGI, June 5). Still unnamed,
the new company will be headquartered in Juno Beach, FL,
In the deal, Entergy investors will receive 0.585 FPL share for each
of their shares, for a total of about $7 billion. The offer is valued at
$30.90 per share, which is about 1.9% more than Entergy's closing price
on Friday (July 28). FPL assumes $6.9 billion in debt and preferred stock.
FPL will purchase $570 million of its shares before the acquisition, and
Entergy will buy back $430 million.
The merger did not sit well with Wall Street last week, as shares of
FPL dropped. Entergy, which had begun to rebound after its sell-off of
foreign investments in 1999, also watched as its stock fell. Tirello said
the drop of both stocks was normal.
"It's going to take 15 months for anything to happen, and we know
that for the next 15 months, nothing else is going to happen at these companies,
so the hot money isn't there," said Tirello. Deutsche Banc Alex Brown
placed Entergy as a "buy" and FPL as a "hold" last
Fitch affirmed the credit ratings of Entergy following the announcement,
calling it "supportive of the operating subsidiaries' stand-alone
credit quality." Fitch said the "merger combines two companies
with similar strategies, which includes continued strong core utility operations
and targeted growth in wholesale energy markets, primarily in clean, low-cost
generation." It said the merger should generate "strong free
cash flow," helping fund the projected growth of the unregulated businesses.
Carolyn Davis, Houston