FPL, Entergy Mega Merger May Be in Doubt

With few clues as to what the holdup could be, FPL Group Inc. and Entergy Corp. said last week in a joint statement that "certain issues have arisen in connection with their pending merger," and that they would meet in the "near future" to address the problems. The merger, announced last July (see NGI, Aug. 7, 2000), was scheduled to close this fall.

Those issues, relating to "governance structure/value-related issues and integration of the two companies going forward," appeared to just about cover the ballpark. "The parties will have no further comment on the status of the merger at the present time."

If the stock-for-stock deal does go through as approved by both boards' shareholders in December, it would create the largest power distributor in the United States. FPL shareholders were expected to own 57% of the stock, with Entergy shareholders holding the remaining stock.

The deal, valued at about $6.3 billion at the time, called for each holder of FPL common stock to receive one share of the new holding company for each share of FPL common stock. Entergy shareholders would receive 0.585 of a share of the new holding company for each share of Entergy common stock. As of yesterday, the merger process continued to proceed through the regulatory process.

In reaction to the announcement, Lehman Brothers downgraded Entergy shares to "buy" from "strong buy." Analyst Daniel Ford said, "due to lack of information surrounding this disclosure, we do believe that there is real potential for share price over-reaction." In a research note, Lehman analyst Allyson Orlando said, "while details were sketchy, the companies cited corporate governance, valuation, and integration issues as points of contention. We view this development as damaging to our investment thesis."

Since the merger announcement last year, both companies' value is considerably higher, with FPL's market cap estimated to have risen to $11 billion from $9.4 billion and Entergy's market cap estimated at $8.2 billion, up from $7 billion.

According to the merger agreement, if one wants to end the merger before it is completed, it would have to pay the other $215 million. However, if the merger did not close by April 30, 2002, they could both withdraw without penalty.

Current Entergy CEO J. Wayne Leonard is to become CEO of the combined company and FPL CEO James Broadhead would become chairman. The new corporate headquarters is to be in Juno Beach, where FPL is now headquartered, while the utility group's headquarters would be in Entergy's current headquarters in New Orleans. FPL would have eight of the 15 board members.

Last month, an administrative law judge moved hearings scheduled at the Louisiana Public Service Commission to this July, reversing an earlier judgment that would have delayed the merger into 2002. The companies have already submitted filings to the Federal Energy Regulatory Commission and regulators in Arkansas, Texas, Louisiana, Mississippi and New Orleans requesting approval. They also will need approval from the Securities and Exchange Commission and the Nuclear Regulatory Commission.

Another company that could be affected if the merger does not proceed is The Shaw Group, based in Baton Rouge, which is in a joint venture with Entergy to build its new power plants (see NGI, June 6, 2000). Fritz von Carp, a Merrill Lynch analyst, said in a research note that without the merger, Shaw's revenue would be down.

"This is significant for Shaw because it has a joint venture with Entergy to build all of Entergy's new power plants," von Carp wrote. However, he added that Shaw was projected to make only 10% of its revenue in fiscal year 2002 from Entergy-FPL projects, and although those projects now were in doubt, "the market remains robust, and Shaw's immediate challenge has been capacity and not demand for its services." Carolyn Davis, Houston



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