Citing a number of irreconcilable differences, including issues related to management and organizational structure and questions raised about financial forecasts, Entergy Corp. and FPL Group last Monday said they were walking away from the altar and foregoing any further pursuit of their proposed merger.

The news didn’t come as a complete surprise to market observers as it followed on the heels of Entergy and FPL Group’s recent joint statement that certain issues cropped up in connection with the proposed merger and that the utilities were planning on meeting to address the problems (see NGI, March 26)

For its part, Entergy cited several areas of disagreement between the utilities, including issues related to governance and leadership. According to Entergy, FPL Group CEO James L. Broadhead proposed changing the merged company’s management structure, which Entergy pointed out was contrary to the specific terms of the merger agreement.

In a conference call with analysts, Leonard said that Broadhead attempted to fire John Wilder, executive vice-president and CFO at Entergy in a late September meeting between Wilder, Leonard, Broadhead and Lewis Hay III, FPL Group’s CFO and executive vice-president for finance.

According to Leonard, Broadhead and Hay were upset with Wilder’s “aggressiveness” related to a power development joint venture.

“I told Mr. Broadhead this situation did not justify such action. John worked for me, and he had no basis or authority to remove John from Entergy or from the new company since that was also under my authority,” Leonard said in recalling the meeting between Entergy and FPL Group executives.

Meanwhile, FPL Group said that a principal reason for its decision to terminate the planned merger related to what it called discrepancies in Entergy’s financial forecasts.

Leonard refuted FPL Group’s characterization of Entergy’s financial projections in the conference call.

“First of all, this transaction was done at market prices, not based upon financial forecasts,” Leonard said. Further, the CEO pointed out that when FPL Group questioned the credibility of Entergy’s forecasts, Entergy’s board took the matter “very seriously.”

Leonard noted that the board’s outside litigation counsel had several independent experts take a look at the company’s process and the integrity of the forecast. “All reached the same conclusion,” Leonard added.

“We have state-of-the-art processes and highly sophisticated and detailed financial forecasts,” the Entergy executive continued.

Although both companies expressed disappointment over the failed deal, executives at Entergy and FPL Group also adopted a bullish outlook related to the future direction of their respective companies.

“I am disappointed that we were unable to complete the merger with Entergy Corporation,” Broadhead said in a prepared statement. “Yet, I am even more convinced today that FPL Group will be a formidable competitor in the energy business and will generate solid value for our shareholders and customers as a stand-alone company,” he added.

Looking ahead, Broadhead said that he expects the company to achieve a 7% increase in earnings per share in 2001, a figure that excludes merger-related expenses. The FPL Group executive also indicated that the utility sees earnings per share increasing an average of 7% over the next several years.

In the conference call last Monday, Leonard said that the company was confident that by continuing to execute its strategy Entergy can continue to deliver average annual earnings growth of 8% to 10%, “and we are focused right now on ways to increase that rate of growth going forward.”

Both companies agreed that no termination fee would be payable under the terms of the merger agreement as a result of the deal’s cancellation.

Had the merger between Entergy and FPL Group been completed, it would have created the largest power distributor in the United States. The deal, valued at about $6.3 billion at the time, called for each holder of FPL common stock to receive one share of the new holding company for each share of FPL common stock. Entergy shareholders would have received 0.585 of a share of the new holding company for each share of Entergy common stock.

Entergy also last week said that it expects first quarter 2001 operational earnings per share to exceed by 10 to 15% the high end of current published earnings consensus estimates primarily due to the strong performance in the utility’s competitive businesses.

Entergy expects operational earnings for all of 2001 to be in the range of $3.00 to $3.20 per share, an estimate that is unchanged from the utility’s previously issued earnings guidance.

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