Wall Street Turns Cold Shoulder To Impressive NCE, NSP Merger
New Century Energies (NCE) and Northern States Power (NSP), two
efficiently-run but merely mid-sized combination utilities, joined
the merger parade last week, promising savings, greater
efficiencies and economies of scale. But the horns on Wall Street
In contrast to the generally favorable reaction of the Street
toward other recent major energy company mergers, the stock prices
of both companies plummeted. The transaction was announced Thursday
with multiple conference calls throughout the day. And a second
round of calls were scheduled Friday to explain in finer detail all
the positive components of the deal to institutional investors. But
shares kept falling. At the close of trading Friday, NSP shares
were at $24.50, down 10% from Wednesday's close, and NCE shares
were $35.56, down 8% from Wednesday. That by itself would not have
been very surprising if analysts and observers had not spent those
two days glorifying the transaction.
The $8.62 billion merger of equals (based on combined market
capitalization), will create a Minneapolis-based electric and gas
utility conglomerate with 3 million power customers and 1.5 million
gas customers in 12 states from Mexico to Canada. The company,
which has not yet been named, also will have a large number of
international assets and operations, including 2 million electric
customers and 400,000 gas customers in the United Kingdom. Power
generation capacity will total 21,720 MW, of which 15,133 MW is
regulated in the U.S. Based on 1998 results, the new company would
have revenues of $6.4 billion, earnings of $618.8 million and
assets totaling $15.1 billion.
"This merger combines two well-managed, Midcontinent electric
and gas companies in order to provide a strong platform for
assuring low-cost, quality service to the region during a time of
rapid change in the utility industry," NSP Chairman James J. Howard
said in a statement.
The merger is expected to be a tax-free, stock-for-stock
exchange and will be accounted for as a pooling of interests. Upon
completion, holders of NCE stock will receive 1.55 shares of the
merged company stock for each share of NCE stock. Each share of NSP
stock will continue as one share of the combined company. Based on
outstanding shares, New Century Energies shareholders will own 54%
of the common equity of the combined company, and Northern States
Power shareholders will own 46%.
NCE and NSP anticipate the merger will be accretive in the first
full year and there will be $80 million in savings primarily
through the reduction of about 100 staff positions through
attrition. The merger is expected to save $1.1 billion over 10
years as a result of consolidating operations, such as procurement
and transportation of fuels, particularly coal.
"I like it. I think it was a very smart move," Ed Tirello of BT
Alex. Brown said Thursday. "I like the Mexico-to-Canada concept. I
like both these companies' foreign operations. Together it will
make them a nice force globally. I also like the fact that when you
look at the numbers they are forming the fifth largest generator
and the third largest [electric] transmission company and the third
largest [electric] distribution company. This is the way the
industry is going, and they are right on top of it. Also, it gives
them about 8%/year growth in earnings after the first year of the
merger, and it's accretive in the first year.
"I don't see anything [bad here]," said Tirello. "I mean there's
no regulatory hassle. There are no market power issues here,"
unlike the previous NSP merger. This merger comes nearly two years
after federal regulators scuttled NSP's proposed combination with
Wisconsin Energy Corp. But the service territories of NCE and NSP
are about 600 miles apart. Their power grids are not connected,
though they say the grids probably will be linked in the near
Why then did Wall Street react negatively?
"Wall Street is focused on what's going to happen in the next 90
days, not what's going to happen over the next year," said Ron
Tanner of Baltimore, MD-based Legg Mason.
"I think this merger is in the best interests of both companies
long-term, but Northern States Power did not pay a high premium to
merge the two companies together and that's why analysts are
disappointed; they're not going to get an immediate bump in the
"It's a good merger," he said. "If they had paid a higher price
for it, Northern States Power's stock would have gone down even
more. It's the right thing to do but it just doesn't fit in to what
Wall Street likes to see.
"We've made it a buy this morning," he said Friday. "We've
raised our rating on the company. It's just way too cheap here.
This is a top-20 company in terms of quality and it's trading in
the bottom five out of 85 companies. It's trading 10 times year
"Basically you're taking two companies that are very healthy,
very competitive, serve different areas of the country and you're
combining them together to get a bigger company. The plus is that
you have a bigger company that's better able to compete in an
industry that's changing. They can spread new investments in
technology over a larger customer base and make them more
The winners in this industry are going to be the ones that have
the most customers, he added. There have been a number of
high-priced mergers lately. But NCE and NSP are "bulking up without
having to pay a big premium. It's good for the shareholders of both
companies longer term."
Northern States Power provides electricity to about 1.5 million
customers in five Midwestern states and distributes gas to more
than 475,000 customers in four Midwestern states and Arizona. It
also owns NRG Energy, a non-regulated energy company, and Viking
Gas Transmission, an interstate pipeline.
New Century Energies serves 1.5 million electricity customers
and more than a million gas customers in six Southwestern states.
Its operating companies include Public Service Co. of Colorado,
Southwestern Public Service Co. and Cheyenne Light, Fuel &
Power. Other subsidiaries include, New Century International, which
owns a 50% interest in Yorkshire Electricity in the UK; Utility
Engineering, which provides engineering services to utilities;
Quixx, which develops cogeneration; Planergy, which provides energy
services; and eprime, an unregulated commodity marketing affiliate.