Bellevue, WA-based Puget Energy, holding company of Puget Sound Energy (PSE), has agreed to be acquired by a private investment consortium led by the North American unit of Australia-based Macquarie Bank Ltd. in a deal valued at $7.4 billion, the company said Friday. Subject to FERC and Washington state regulatory approvals, the merger is targeted to close by mid-year 2008.

Puget Energy and PSE will remain headquartered in Bellevue, and Steve Reynolds will remain CEO with the current management team in place, according to Puget's announcement, which said its board has approved the deal and that as part of the agreement the board will seek "superior proposals from third parties" through Dec. 10 and will review any competing offers.

PSE is a combination utility serving the rapidly growing western area of the state of Washington outside Seattle, which has a municipal electric utility. It faces considerable capital infrastructure expenditures for serving more than 1 million electric and 721,000 natural gas utility customers. A key benefit of the proposed acquisition from the company's perspective are provisions for obtaining $5 billion in capital over the next five years from the Macquarie-led consortium, Puget said.

Puget billed the acquiring group as "long-term infrastructure investors," led by New York City-based Macquarie Infrastructure Partners (MIP), the Canada Pension Plan Investment Board and British Columbia Investment Management Corp., along with Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Bank Ltd. They are prepared to pay $30/share in cash, representing a 25% premium based on Puget Energy's closing share price Oct. 25.

The deal follows the private equity-backed buyout of TXU Corp. by a group called Texas Energy Future Holdings LP (TEF), which was formed by Kohlberg Kravis Roberts & Co. and Texas Pacific Group to acquire TXU. The deal was completed earlier this month.

Based on recent history, the Puget transaction could face an uphill battle with the Washington Utilities and Transportation Commission. Similar deals to take major utilities private in Arizona and Oregon have been rejected by state regulators. However, more recently, a Macquarie-led consortium took Duquesne Light in Pittsburgh, PA, private earlier this year in a $1.59 billion deal.

"Like many other utilities, PSE faces significant future capital requirements to meet the growing energy needs of our customers while continuing to provide safe and reliable service to this dynamic region," said Stephen Reynolds, Puget and PSE CEO. "The merger will insulate us from volatility in the pubic equity markets."

Reynolds said Puget's new investors "share our vision of a greener future," and will help the utility make that future a reality that will provide equal measure of environmental protection and reliability in the energy system.

MIP CEO Christopher Leslie said the consortium of investors has "significant experience in managing energy and utility investments in the United States and around the world." Macquarie established a North American energy trading operation earlier this year and completed the Duquesne utility deal.

In conjunction with the transaction, which will be funded by a combination of private shareholder capital ($3.2 billion), new debt ($1.6 billion) and assumption of Puget's existing debt ($2.6 billion), the consortium committed to an initial investment of about $300 million in 12.5 million shares of newly issued Puget Energy common stock by way of a separate private placement priced at $23.67/share to fund the company's ongoing construction program and working capital needs. "It is anticipated this private placement will occur prior to the end of this year," Puget said.

In addition, the consortium will secure credit facilities for an least $2.15 billion to help fund PSE's growing utility capital expenditure program and working capital needs, along with supporting energy hedging activities at the close of the deal next year.

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