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

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

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

By adding WICOR’s gas customer base to its own, Wisconsin Energywill have “the size, scope and skills needed to compete in theemerging regional energy market and a solid platform for continuedgrowth,” said Richard A. Abdoo, who will continue as chairman,president and CEO of Wisconsin Energy.

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

The proposed acquisition elicited kudos from financial analysts.”I think it was a brilliant move myself. Wisconsin Energy [andWICOR] both serve in the same state. It makes a tremendous amountof sense as far as savings go. The ratepayer will certainly save.The shareholder will do well also,” said Edward Tirello, utilityanalyst for Deutsche Banc Alex. Brown. “Wisconsin Energy needs toexpand their non-utility base. And WICOR has that great pumpbusiness,” which has “already got an established base; they knowexactly what they’re doing, and they can just build right offthat.”

WICOR subsidiaries manufacture pumps for a variety ofapplications, including swimming pools, spas, wells and sump pumps.Its Sta-Rite Industries and SHURflo Pump Manufacturing divisionssell the majority of their products through Sears and Home Depotstores. This is a “darn good business,” said Donato Eassey, firstvice president at Merrill Lynch. The products are “well knownnames.” The acquisition of WICOR’s pump manufacturing divisions”certainly gives them [Wisconsin Energy] a much larger growthplatform on a relatively accretive basis,” he noted.

The news of the Wisconsin Energy-WICOR transaction rekindledmemories of Wisconsin Energy’s failed attempt to acquireMinneapolis, MN-based Northern States Power Co. three years ago.The $6 billion merger deal collapsed in 1997 after running intoproblems with Wisconsin regulators. But Wisconsin Energy andanalysts don’t expect to see a repeat of that this time around.

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

“I think this is a much simpler acquisition [than NorthernStates]. It doesn’t have the market-power issues on the electricside. It’s just a combination really of the gas distributionsystems, which are regulated and will remain regulated businesses.So I think that this should be fairly straightforward, and I thinkthe regulators should be able to approve it with a fair amount ofdispatch,” said Doug Fischer, senior electric utility analyst forAG 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 longas WICOR surrenders their electric marketing license, which they’venever used.”

Since its failed bid for Northern States, Wisconsin Energy hasnot been sitting idle. Rather, it has been snatching up energyassets in smaller merger transactions. It bought Edison SaultElectric Co., a small Michigan utility, for $71 million two yearsago, and it has acquired a number of power plants in theNortheast.

Wisconsin Energy’s bid for WICOR did not take analysts bysurprise. “Our gas utility analysts have said, and we agree, thatalmost any gas distribution company is a potential target eitherthrough a combination with another gas company, or—as has beenhappening more frequently recently—with…..an electric utility,”AG Edwards’ Fischer noted. Deutsche Banc’s Tirello said his companypredicts there will be no free-standing gas distributors threeyears from now-they will have all been gobbled up by electricutilities.

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

Wisconsin Energy and WICOR expect the transaction to receive allthe necessary regulatory approvals and be completed by the springof 2000. Within the first full year of operation, they project thenew company will show savings of about $35 million. No layoffs areanticipated as a result of the deal, said Wisconsin Energy’s John.

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

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