In a move creating an entity that will challenge CMS EnergyCorp. for the title of Michigan’s largest gas and electric utility,DTE Energy Co. announced the purchase of MCN Energy Group yesterdayin a cash and stock transaction valued at $2.6 billion. Thecombined company will be headquartered in Detroit and named DTEEnergy Co. The merger is expected to be one of the speediest amongutilities, closing in six to nine months.

Including the assumption of MCN’s debt, the value of thetransaction is around $4.6 billion. Upon completion, the new DTEwill have approximately 11,500 employees, serving 2.1 millionelectric customers and 1.2 million natural gas customers inMichigan. It will have an energy portfolio consisting of more than11,000 MW of generating capacity, 600 Bcf/year of natural gasdeliveries and 185 Bcf of natural gas storage capacity, with assetstotaling more than $17 billion and annual revenues exceeding $6billion. DTE will also gain MCN’s 25% interest in the VectorPipeline project, 10.5% interest in the Millenium Pipeline projectand 23% interest in the Portland Natural Gas Transmission SystemPipeline project.

It’s intrastate rival, CMS’ Consumer’s Energy, has 1.6 millionelectric customers and 1.5 million gas customers. Overall, CMSCorp. has annual sales of about $6 billion and assets of about $14billion.

DTE, which announced it was in the market to acquire a gas supplierlast April (see Daily GPI, April 30),said the synergies of this combination will position the new companyto market coal, gas and electricity in the region and to compete moreeffectively in the development of new power plants and distributedgeneration. MCN’s Michigan Consolidated Gas (MichCon), a gas utilityserving 1.2 million customers in 500 Michigan communities, and DTE’sDetroit Edison, Michigan’s largest electric utility serving 2.1million customers, will retain their corporate identities and beoperated as subsidiaries of DTE. The two utilities have 775,000customers in common.

“The transaction is expected to be accretive to DTE’s earningsper share within the first full year of operation and will provideimmediate and meaningful operating synergies by creating economiesof scale and by leveraging the contiguous and overlapping serviceterritories of our two companies,” said Anthony F. Earley, DTE’sCEO.

“The [merger] is expected to produce annual cost savings ofapproximately $60 million. The combined company will be wellpositioned to capture the enormous growth opportunities in theattractive Great Lakes-to-Northeast corridor, which currentlyaccounts for about half of the nation’s total energy consumption.”Most of the savings will come through cutting overlap in thesupport services and information systems areas of the new company,Early added later on in a press conference.

Earley said the utilities are committed to keeping layoffs to aminimum. “While we can never guarantee no layoffs, both of ourcompanies have embraced a ‘no-layoff’ philosophy, and we will workwithin that philosophy and make every effort to accomplish anymerger-related reductions through attrition, voluntary early outs,reduced hiring and retraining.” DTE expects a staff reduction inthe 500-person range because of the transaction.

While the merger itself did not surprise Mike Heim, an analystfor A.G. Edwards, the timing of the announcement did. “It’s fair tosay that before this merger, MCN was a struggling company. The factthat it was bought isn’t surprising. What is surprising is thatthis deal was made so soon after MCN made its new corporatestrategy public. They didn’t give that much time to succeed.”

The corporate strategy Heim alluded to was announced in earlyAugust (see Daily GPI, Aug. 3). Itcalled for an increased focus on regional operations and caused thecancellation of some major asset sales. The change of direction was amain contributor in MCN’s $86.2 million net loss for 2Q99. It also wasthe latest in a string of bad news for the company which includedrogue traders falsifying earnings and disappointing financialperformances due to poor market conditions (see Daily GPI, June 10; May18).

Despite MCN’s struggles, Heim said the merger made sense and hasa tremendous upside. “Anytime management moves to increase thecompany’s stock price over 30%, there must be lots of positivesigns. One thing that I like about this marriage is that it appearsto be very clean. By that I mean there appear to be few regulatoryhurdles. The utilities do not have to file with the Michigan PublicService Commission, and they only have to sell a few power plantsto satisfy the [Department of Justice’s] Security and ExchangeCommission (SEC). The ability to close a merger of this size in sixto nine months is attractive.”

In order to satisfy federal requirements, Alfred Glancy, MCN’sCEO, said interest in four power plants will have to be sold. Threeof them, including the Midland Cogeneration Venture, are located inMichigan and the other is in California. Glancy said the sales willbe completed before the merger closes. He estimated the total bookvalue for the assets to be between $125-$175 million. In additionto the SEC, the utilities also need FERC and shareholder approval.Cheryl Conway, a spokesperson for MCN, said the merger will befiled with FERC soon but offered no other details. The union hasbeen unanimously approved by the boards of both companies.

Under the terms of the agreement, the holder of each share ofcommon MCN stock can elect to receive either $28.50 in cash/shareor 0.775 shares of DTE Energy common stock per share. DTE intendsto continue its dividend policy of $2.06/share annually,representing a dividend increase per share to current MCNshareholders of approximately 56.5%.

DTE’s offer represents a 60% premium over MCN’s Oct. 1 shareprice. Early was quick to defend the offer at the press conference.”The MCN stock is trading at a discount because of some of itswrite-offs and issues that they’ve had to deal with. The [MCN]stock is really a $21 to $22 stock, rather than a $17 stock. Ourdue diligence confirmed that and if you take away the perceptionalimpact of some of those write-offs, this stock should be trading inthe $21 to $22 range. This is a premium in the 30% range, which isright in the median for a utility transaction like this.” MCN’sstock soared after the merger news was released, increasing over30% to finish at $23.44. DTE’s stock value dropped nearly 10% tofinish at $33.23.

Upon completion of the merger, Glancy will retire from MCN andjoin the board of directors of DTE, and Earley will serve aschairman, president and CEO. Joining Earley in the office of thepresident will be Stephen E. Ewing, current president and COO ofMCN, who will serve as president and COO of the gas business. DTE’sexisting 12-member board of directors will be expanded to includeGlancy and two additional outside directors from MCN.

DTE’s financial advisor on the transaction is Warburg DillonRead LLC and its legal advisors are Sullivan & Cromwell andHunton & Williams. MCN’s financial advisor is Merrill Lynch& Co. and its legal advisor is Wachtell, Lipton, Rosen &Katz.

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