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Eastern Enterprises Bids on Third Distributor in a Year

Eastern Enterprises Bids on Third Distributor in a Year

Just as McDonald's ambition when it first started out was to serve one million customers, Eastern Enterprises-which yesterday announced plans to acquire its third gas distribution company in less than a year-says its immediate goal is to serve one million natural gas customers in New England.

Weston, MA-based Eastern Enterprises, already the largest gas distributor in New England, reported it signed a definitive agreement to buy EnergyNorth Inc. of Manchester, NH, giving it a foray into the "very economically strong" gas market in the southern part of the state and pushing it close to the one-million mark. This comes on the heels of its purchase of Essex Gas last September and its pending acquisition of Colonial Gas, which is awaiting approval from Massachusetts' regulators. Both distributors serve northeastern Massachusetts and Cape Cod.

"I think that this [latest] transaction along with other ones similar to it are just baby steps," said Donato Eassey, first vice president of Merrill Lynch, which is advising Eastern Enterprises on the EnergyNorth deal. "What I mean is that these companies that are combining today will have to become part of an even bigger entity down the road" in order to compete. "They [Eastern Enterprises] clearly have a strategy to go down that road."

Even if the EnergyNorth and Colonial Gas acquisitions get the needed regulatory approvals, Eastern Enterprises will not be considered "large by what tomorrow's standards are going to look like," the financial analyst told NGI. In the intermediate term, companies will require "upwards of five million customers or so" to be competitive in energy markets. "And in the longer term, it may be 30 million customers."

So for Eassey, Eastern Enterprises' immediate goal of one million gas customers-although laudatory-isn't enough for today's energy market. "I have a lot of companies that have a million customers, and they're still not efficient enough." He noted the pressure to reduce costs is particularly evident in the New England market.

The proposed acquisition of EnergyNorth, parent of EnergyNorth Natural Gas, for an "enterprise value" of $202 million in cash, stock and debt would give Eastern Enterprises about a 35% share of the gas distribution market in New England, said company spokeswoman Jane W. McCahon. Eastern Enterprises-through its Boston Gas and Essex Gas affiliates-currently serves 580,000 customers in Boston, MA, and in 90 other eastern and central Massachusetts communities. The completion of the purchases of EnergyNorth and Colonial Gas, which has an equity value of about $332 million, would raise the number of its gas customers to more than 800,000.

EnergyNorth's 49% interest in an unregulated propane business, VGS Propane, also would provide Eastern Enterprises with access to an additional 15,000 customers in New Hampshire and 10,000 customers in Vermont. Moreover, Eastern Enterprises' HVAC (heating ventilation and air conditioning) business, which serves commercial and industrial customers, will be a "nice fit" with EnergyNorth's HVAC business, which caters to residential customers, said McCahon.

Eastern Enterprises said it expects to close the Colonial deal by the end of the third quarter, and the EnergyNorth transaction within nine months subject to the approvals of EnergyNorth shareholders, the Security and Exchange Commission and New Hampshire regulators. The proposed purchase of EnergyNorth already has been approved by the boards of directors of both companies. Once the merger is completed, EnergyNorth's distribution company-EnergyNorth Natural Gas-will become a wholly-owned subsidiary of Eastern Enterprises, and its unregulated businesses will operate as separate subsidiaries.

Under the terms of the agreement, EnergyNorth's shareholders would receive $47 for each share that they own, a 58% premium over the closing price for EnergyNorth stock on Wednesday and 2.6 times the company's book value as of March 31. Based on the number of EnergyNorth shares outstanding on March 31st, the transaction has an equity value of $156 million, and calls for the assumption of $46 million of debt. EnergyNorth stockholders can receive either cash, Eastern common stock, or a combination of both, in return for their shares.

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