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Wisconsin Energy Makes Bid for WICOR

Wisconsin Energy Makes Bid for WICOR

The groundwork for an even more concentrated U.S. energy industry was laid Monday as Wisconsin Energy Corp., a Milwaukee, WI-based electric and gas utility, announced plans to acquire neighboring gas distributor WICOR Inc. for about $1.51 billion in cash, stock and debt, creating a major Midwest energy concern and the 13th largest utility in the nation.

The definitive merger agreement, which was approved by the boards of directors over the weekend, would establish a company with a combined market capitalization of about $7.3 billion, including $4.5 billion in equity and $2.8 billion in debt and preferred stock. The deal would be accounted for as a purchase and is expected to be accretive to earnings during 2001.

The transaction would shore up the gas distribution business of Wisconsin Energy by merging the gas operations of its combined utility, Wisconsin Electric, with WICOR's gas distribution company, Wisconsin Gas. The deal would not involve the combination of any electric assets. The merged company would have about 921,000 natural gas customers in Wisconsin and more than one million electric customers in Wisconsin and Michigan's Upper Peninsula.

By adding WICOR's gas customer base to its own, Wisconsin Energy will have "the size, scope and skills needed to compete in the emerging regional energy market and a solid platform for continued growth," said Richard A. Abdoo, who will continue as chairman, president and CEO of Wisconsin Energy.

Also the acquisition would provide Wisconsin Energy with an avenue for growth in the non-utility sector through WICOR's pump businesses, which accounted for almost half of the company's $45 million in earnings last year and $944 million in revenues. Analysts have projected an annual growth rate for WICOR's pump operations of more than 15%.

The proposed acquisition elicited kudos from financial analysts. "I think it was a brilliant move myself. Wisconsin Energy [and WICOR] both serve in the same state. It makes a tremendous amount of sense as far as savings go. The ratepayer will certainly save. The shareholder will do well also," said Edward Tirello, utility analyst for Deutsche Banc Alex. Brown. "Wisconsin Energy needs to expand their non-utility base. And WICOR has that great pump business," which has "already got an established base; they know exactly what they're doing, and they can just build right off that."

WICOR subsidiaries manufacture pumps for a variety of applications, including swimming pools, spas, wells and sump pumps. Its Sta-Rite Industries and SHURflo Pump Manufacturing divisions sell the majority of their products through Sears and Home Depot stores. This is a "darn good business," said Donato Eassey, first vice president at Merrill Lynch. The products are "well known names." The acquisition of WICOR's pump manufacturing divisions "certainly gives them [Wisconsin Energy] a much larger growth platform on a relatively accretive basis," he noted.

The news of the Wisconsin Energy-WICOR transaction rekindled memories of Wisconsin Energy's failed attempt to acquire Minneapolis, MN-based Northern States Power Co. three years ago. The $6 billion merger deal collapsed in 1997 after running into problems with Wisconsin regulators. But Wisconsin Energy and analysts don't expect to see a repeat of that this time around.

Wisconsin Energy has had preliminary discussions with the Wisconsin Public Service Commission, and it has reacted more favorably to this transaction, said company spokesman Michael John. Wisconsin Energy contends the merger would result in lower rates for the state's gas customers, but it couldn't quantify the proposed savings or indicate when they might occur.

"I think this is a much simpler acquisition [than Northern States]. It doesn't have the market-power issues on the electric side. It's just a combination really of the gas distribution systems, which are regulated and will remain regulated businesses. So I think that this should be fairly straightforward, and I think the regulators should be able to approve it with a fair amount of dispatch," said Doug Fischer, senior electric utility analyst for AG Edwards in St. Louis, MO.

He doesn't even believe the deal will require FERC's blessing. The "expectation is that FERC approval may not be required as long as WICOR surrenders their electric marketing license, which they've never used."

Since its failed bid for Northern States, Wisconsin Energy has not been sitting idle. Rather, it has been snatching up energy assets in smaller merger transactions. It bought Edison Sault Electric Co., a small Michigan utility, for $71 million two years ago, and it has acquired a number of power plants in the Northeast.

Wisconsin Energy's bid for WICOR did not take analysts by surprise. "Our gas utility analysts have said, and we agree, that almost any gas distribution company is a potential target either through a combination with another gas company, or---as has been happening more frequently recently---with.....an electric utility," AG Edwards' Fischer noted. Deutsche Banc's Tirello said his company predicts there will be no free-standing gas distributors three years from now-they will have all been gobbled up by electric utilities.

Under the terms of the merger agreement, WICOR shareholders will receive a fixed price of $31.50 for each share of stock that they own, a 10% premium over the closing price of $28.13 for WICOR stock on Monday. Wisconsin Energy said at least 40% of the purchase price will be paid in stock, but the ratio could be raised to 60%, or it could elect to pay all cash. Wisconsin Energy stock closed Friday at 27 1/16.

Wisconsin Energy and WICOR expect the transaction to receive all the necessary regulatory approvals and be completed by the spring of 2000. Within the first full year of operation, they project the new company will show savings of about $35 million. No layoffs are anticipated as a result of the deal, said Wisconsin Energy's John.

Under the agreement, George E. Wardeberg, chairman and CEO of WICOR, will become vice chairman of the board of Wisconsin Energy, reporting to Abdoo. He will continue in that position until he retires in two years.

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