Atlanta-based AGL Resources and Naperville, IL-based Nicor Inc. said Tuesday they plan a merger that would create a holding company with seven regulated gas distribution companies serving 4.5 million customers in Illinois, Georgia, New Jersey, Virginia, Florida, Tennessee and Maryland and with a rate base of $3.8 billion. The combined company would be the nation's largest gas-only distributor.
Nicor would merge with an AGL subsidiary in a deal with an enterprise value of $3.1 billion, including equity of $2.4 billion. The combined company have an enterprise value of $8.6 billion. Corporate headquarters would be in Atlanta with gas distribution headquarters in Naperville.
AGL Resources shares closed down nearly 6% Tuesday at $34.98 in heavy trading on the New York Stock Exchange (NYSE). However, Nicor shares closed up more than 4% at $48.79 in trading on the NYSE that was also heavy.
"Together we will establish a platform for growth that is superior to what either company could achieve on its own," said AGL Resources CEO John W. Somerhalder II. "...[W]e will have increased scale and greater diversity in both our regulated operations and unregulated businesses. We will effectively double the number of utility customers we serve...In addition, AGL Resources and Nicor have complementary unregulated businesses, which will be a source of significant incremental growth opportunities and savings."
Shareholders of Nicor would receive for each share of Nicor common stock $21.20 in cash and 0.8382 shares of AGL Resources common stock, which together represent a value of $53.00 based on the volume-weighted average price for AGL Resources common stock for the 20 trading days ended Dec. 1, 2010. After the merger AGL Resources shareholders would own 67% and Nicor shareholders would own 33% of the combined company.
The transaction is anticipated to be neutral to AGL Resources' earnings per share (EPS) in the first full year following the close and accretive thereafter. The deal is expected to be completed in the second half of 2011.
The consideration of $53.00/share represents a premium of approximately 22% to the unaffected closing stock price of Nicor on Dec. 1 and an approximately 17% premium to the average stock price of Nicor over the last 20 days ending Dec. 1.
Gordon Howald, an analyst with East Shore Partners, cut his rating on AGL Resources shares to "hold" from "buy" and said in a note the deal with Nicor represented "an expensive acquisition," Reuters reported. "We are concerned by the premium AGL is willing to pay for Nicor, particularly given its strong relative peer performance in 2010 and AGL's weak relative peer performance," Howald said.
AGL Resources serves 2.3 million customers in six states. AGL Resources utilities are Atlanta Gas Light, Chattanooga Gas, Elizabethtown Gas, Elkton Gas, Florida City Gas and Virginia Natural Gas. Georgia regulators last fall approved a 10-year, $400 million infrastructure upgrade program for Atlanta Gas Light (see Daily GPI, Oct. 8, 2009).
AGL Resources also owns Houston-based Sequent Energy Management, an asset manager serving natural gas wholesale customers throughout North America. As an 85% owner in the SouthStar partnership, AGL markets gas to consumers in Georgia under the Georgia Natural Gas brand. The company also owns and operates two high-deliverability gas storage facilities: Jefferson Island Storage & Hub near the Henry Hub in Louisiana (see Daily GPI, Aug. 20, 2009) and Golden Triangle Storage in Texas (see Daily GPI, Aug. 12).
For the third quarter AGL Resources reported an 83% improvement in earnings compared with the year-ago quarter (see Daily GPI, Nov. 3). Higher rates and new pipeline projects were credited.
Nicor Inc.'s primary business is Nicor Gas, one of the nation's largest gas distribution companies. Nicor also owns Central Valley Gas Storage, which is developing a market area storage facility in the Sacramento River valley of north-central California (see Daily GPI, Oct. 20). Additionally, the company's Nicor Enerchange LLC consists of Nicor Enerchange Trading and Nicor Enerchange Hub Administration. Nicor Enerchange Trading is a gas marketing company that provides commodity-based services in the wholesale and commercial/industrial gas markets. Nicor Enerchange Hub Administration manages the Chicago Hub for Nicor Gas and offers its marketing and service administration expertise to other asset owners.
"This transaction provides our shareholders with a significant premium for their shares, the opportunity for ownership in a combined company with upside potential for growth and a substantial dividend uplift immediately following closing," said Nicor CEO Russ M. Strobel.
The combination would create a company with:
The combined company would be known as AGL Resources. Somerhalder would continue to serve as chairman, president and CEO. The AGL Resources board would include four directors from Nicor.
AGL Resources would pay for the transaction through an exchange of stock with Nicor shareholders in addition to approximately $1 billion of cash. AGL Resources has committed financing from Goldman Sachs Bank USA and plans to put long-term financing in place, consisting exclusively of bonds, prior to closing, the company said.
Shareholders of both companies must approve the deal, so must the Illinois Commerce Commission and the Federal Communications Commission. Antitrust clearance is also required.
Moody's Investors Service Tuesday affirmed its stable ratings on debt of AGL Resources and subsidiaries. "The affirmation...is based on [AGL Resources] issuing sufficient equity as part of the acquisition financing so that the expected debt issuance will have minimal impact on the combined consolidated credit metrics," said Moody's Vice President Mihoko Manabe.
Nicor's stronger credit metrics and stability as a mostly regulated gas utility also help to sustain AGL Resources' ratings, Moody's said. Moody's estimated that the transaction would increase AGL Resources' consolidated long-term debt about 80% while raising its cash flow pre-working capital by slightly more than 100%.
Standard & Poor's Ratings Services (S&P) placed long-term ratings on AGL Resources and subsidiary Atlanta Gas Light Co. on CreditWatch with negative implications. "At the same time, we are affirming the 'A-2' commercial paper rating on AGL [Resources]. We are also placing all of our ratings, including the 'AA' corporate credit rating and 'A-1+' commercial paper rating, on Nicor Inc. and its subsidiary Nicor Gas Co. on CreditWatch with negative implications. As of Sept. 30, 2010, AGL had $2.5 billion in debt and Nicor had $872 million in debt," S&P said.
The firm pointed out that regulatory approvals of the deal could "take significant time. Reviews of utility acquisitions in recent years have often taken nine-15 months. In this case, the Illinois Commerce Commission represents the key regulatory hurdle. We expect that the CreditWatch listings on AGL and Nicor could stay in place for close to a year or possibly longer."
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