Analysts: El Paso-Southern Merger Dead for Now
It's been all talk but no action and as a result industry
analysts are starting to back away from rampant rumors of a
potential merger between Southern Co. and El Paso Energy.
Merrill Lynch energy analyst Donato Eassey told NGI El Paso all
but killed the potential merger at a midweek company meeting when
CEO William Wise told employees El Paso was not for sale. Neither
El Paso nor Southern would comment on the merger or the meetings.
"I wasn't at the meetings so I'm paraphrasing, but basically El
Paso's CEO said he wasn't shopping the company around. It would be
detrimental, from a PR standpoint, to say this and then go through
with the merger," Eassey said. "It turns out that all that
speculation that sprung up Wednesday was just speculation after
The rumor mill fired up after the Monday announcements from
Dominion Resources/Consolidated Natural Gas and Sempra Energy/KN
Energy. Industry observers began to speculate that a Southern
purchase of El Paso Energy would be the next mega-gas-and-electric
combination. The rumors gained steam on Wednesday morning when El
Paso's stock price opened at a 52-week high of $39 per share after
closing the night before at $35.125 per share.
One source said the reason the merger was not carried out was
because El Paso's management was asking too much. "The top
executive at El Paso is making two to three times what he would
make at Southern. Call it social issues or whatever you want, but
this type of thing is usually a deal breaker."
Merrill Lynch's Eassey did, however, leave the door slightly
open. "I'm not saying it won't ever happen, but the opportunity
hasn't manifested itself and it doesn't look like it will."
Southern is probably not done in its bid to gain significant gas
assets. "Southern Co., however, would serve itself well to acquire
a gas asset like an El Paso, a Sonat, or a Coastal. With the onset
of electric deregulation, major electric companies are realizing
one-trick ponies have no chance, and are therefore trying to
reinvent themselves by acquiring gas assets."
Ed Tirello, an analyst for BT Alex. Brown, said the two
companies had been in negotiations long before breaking off this
week. "Now the rumor is the negotiations are off, but I'm still
holding out hope because I think the move makes such good sense. El
Paso is Southern's best fit. Both companies have coast-to coast
operations, as well as similar international settings. The
economics of this deal are not hard to figure out."
ElÿPaso, headquartered in Houston, owns the nation's only
integrated coast-to-coast natural gas pipeline system, with more
than 26,000 miles of transmission lines. It has more than $9.5
billion in assets, also including 10,000 miles of gas gathering and
25 processing plants, international infrastructure development, and
energy marketing. El Paso's wholesale marketing operation sold 3.77
Bcf/d of gas in 1998, which put the company at No. 17 in NGI's
ranking of the top-20 largest gas marketers based on physical sales
Southern is an international energy company with $35 billion in
assets through regional utilities and operations around the world.
It is the largest producer of electricity in the United States and
one of the world's largest independent power producers. Based in
Atlanta, Southern Company is the parent firm of Alabama Power,
Georgia Power, Gulf Power, Mississippi Power and Savannah Electric.
Through its Southern Energy Inc. subsidiary, Southern Company
supplies electricity in 10 countries on four continents. It also
provides energy-related marketing, trading and technical services
and Southern LINC wireless telecommunications. In 1998, Southern
Company Energy Marketing, a partnership with Vastar, sold 5.3 Bcf/d
of gas, putting it at No.9 in NGI's ranking of the Top-20 largest
gas marketers based on volume sold. The marketing operation also
sold 185.1 million MWh in 1998 making it the second largest power
marketer in the nation behind only Enron Corp. For the nine months
ended 9/98, revenues fell 5% to $8.88 billion. Net income
applicable to Common rose 32% to $1.03 billion.