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National Grid in the Lead for KeySpan

National Grid 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 Wall Street Journal reported Friday that National Grid's offer for KeySpan is nearly $7.3 billion ($42/share) and 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 morning and last week declined to comment on any speculation of talks with KeySpan (see Daily GPI, Feb. 21). 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.

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.

National Grid said last week 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 Daily GPI, Feb. 17).

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