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UGI to Shed Utility As Part of Merger Deal

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 nationwide business."

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 &amp 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.

Susan Parker

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