UGI to Shed Utility As Part of Merger Deal
The merger bandwagon continued last week as UGI Corp. announced
a proposed deal that would join its retail propane marketing
business with the largest marketer and distributor of printing and
imaging paper and supply systems. UGI will sell UGI Utilities as
part of the transaction, making it the first company "in recent
times" to completely shed itself of its utility business. The
company says it can take such a dramatic step because, unlike other
utilities, it has another "very distinct" business (propane) that
accounts for about two-thirds of its annual revenues.
Wall Street reacted negatively to the proposed stock-for-stock
merger of Valley Forge, PA-based UGI and Unisource Worldwide Inc.
of Berwyn, PA, with many analysts questioning the strategic value
of the deal. "You need to look at this as two distribution
companies merging, and not focus on the [different] products," said
one of the merging parties. The companies insist they are a natural
fit, given that they are located close to each other, have similar
distribution networks nationwide and similar procurement practices.
Edward Tirello, a utility analyst with BT Alex. Brown in New
York, was one of the few who wasn't critical of the proposed
merger, but he conceded that while Wall Street generally preferred
"cookie-cutter vanilla" deals, he liked "things that [were] a
little off the wall." He thinks a UGI-Unisource marriage has many
synergies. Excluding the products of the companies, "it's the same
business - trucks, salesmen, delivery people, customer service,
billing and collection. All that stuff can be meshed together on a
In short, the merger of a major propane maker and paper products
company "makes a lot of sense. Even though they [UGI] paid a high
premium and everything else, it's got a high cash flow. It looks
like a smart idea to form a different type of distribution channel
company," Tirello said. In his view, if companies "are going to
step out [of their original business], they should step all the way
out, get the best price [they] can and move on."
He thinks UGI's decision to sell its gas and electric utility
business is a wise move. "You got to give them credit. I mean the
gas distribution business was too small to survive, and there's a
feeding frenzy of electric companies that want to buy these. In
fact, in the next five years they'll own all of them. So they might
as well put it out for auction and get the highest bid."
Another energy analyst viewed the proposed merger less
favorably. "It's a functional marriage...a marriage of convenience.
UGI has always been challenged [in] where to go in its
diversification. It looks like they've gone into [an] exotic
business," said the analyst, who asked that his name not be used.
UGI is a holding company with three subsidiaries: AmeriGas Inc.,
which is the majority shareholder of AmeriGas Partners L.P., the
nation's largest marketer of propane; UGI Utilities of Reading, PA,
a natural gas and electric utility serving eastern half of
Pennsylvania; and UGI Enterprises, a supplier of energy services.
UGI Utilities, which will be divested, provides gas service to
258,000 customers in 14 eastern and southeastern counties in
Pennsylvania, and electric service to 61,000 customers in two
northeastern counties. UGI Enterprises will be folded into the
merged company. It is involved in the GASMARK venture, which
manages delivery of natural gas to more than 900 commercial and
industrial customers on 15 utility systems in Maryland, New Jersey,
Ohio, Pennsylvania, Virginia and the District of Columbia.
Unisource Worldwide is the largest distributor of printing and
imaging products, packaging systems and sanitary-maintenance
supplies in North America. Unisource and UGI had combined
distribution sales of about $8.8 billion in fiscal 1998.
UGI plans to reinvest the cash proceeds from the sale of UGI
Utilities in the distribution businesses of the combined company.
Revenues from UGI's propane business for fiscal 1998 were more than
double ($914.4 million) those of the utility side ($422.3 million).
The company expects to get a "good price" for UGI Utilities,
somewhere between 2.5 and 3 times its estimated book value of
approximately $220 million. "It's a very strong utility...a very
profitable utility." UGI "will get at least twice book" for UGI
Utilities, said Tirello, but he doubted it could get three times
book value. "They're not in that position." UGI said it plans to
sell off the utility unit once the merger is completed, which it
anticipates will occur by late June.
Energy analysts expect to see a lot of interest in the utility.
"It is a very good utility. It can be readily merged with any of
the New York or New Jersey or other Pennsylvania local distribution
companies, or it can be picked up by an electric too." Possible
interested parties will be Pennsylvania Power & Light, GPU,
Consolidated Edison, Equitable Gas "and all the other local guys in
the neighborhood," said Tirello.
Under the merger agreement, UGI will exchange 0.566 common share
of UGI stock for each Unisource Worldwide share. Based on the
closing stock prices on Feb. 26 (just before the boards approved
the merger agreement), that valued the deal at $815 million, or
$11.50 per Unisource share, which was a 65% premium over its Feb.
26th closing price. The merger deal also calls for UGI to assume
$685 million of Unisource Worldwide's debt.