The merger bandwagon continued last week as UGI Corp. announceda proposed deal that would join its retail propane marketingbusiness with the largest marketer and distributor of printing andimaging paper and supply systems. UGI will sell UGI Utilities aspart of the transaction, making it the first company “in recenttimes” to completely shed itself of its utility business. Thecompany says it can take such a dramatic step because, unlike otherutilities, it has another “very distinct” business (propane) thataccounts for about two-thirds of its annual revenues.

Wall Street reacted negatively to the proposed stock-for-stockmerger of Valley Forge, PA-based UGI and Unisource Worldwide Inc.of Berwyn, PA, with many analysts questioning the strategic valueof the deal. “You need to look at this as two distributioncompanies merging, and not focus on the [different] products,” saidone of the merging parties. The companies insist they are a naturalfit, given that they are located close to each other, have similardistribution networks nationwide and similar procurement practices.

Edward Tirello, a utility analyst with BT Alex. Brown in NewYork, was one of the few who wasn’t critical of the proposedmerger, but he conceded that while Wall Street generally preferred”cookie-cutter vanilla” deals, he liked “things that [were] alittle off the wall.” He thinks a UGI-Unisource marriage has manysynergies. Excluding the products of the companies, “it’s the samebusiness – trucks, salesmen, delivery people, customer service,billing and collection. All that stuff can be meshed together on anationwide business.”

In short, the merger of a major propane maker and paper productscompany “makes a lot of sense. Even though they [UGI] paid a highpremium and everything else, it’s got a high cash flow. It lookslike a smart idea to form a different type of distribution channelcompany,” Tirello said. In his view, if companies “are going tostep out [of their original business], they should step all the wayout, get the best price [they] can and move on.”

He thinks UGI’s decision to sell its gas and electric utilitybusiness is a wise move. “You got to give them credit. I mean thegas distribution business was too small to survive, and there’s afeeding frenzy of electric companies that want to buy these. Infact, in the next five years they’ll own all of them. So they mightas well put it out for auction and get the highest bid.”

Another energy analyst viewed the proposed merger lessfavorably. “It’s a functional marriage…a marriage of convenience.UGI has always been challenged [in] where to go in itsdiversification. It looks like they’ve gone into [an] exoticbusiness,” 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., thenation’s largest marketer of propane; UGI Utilities of Reading, PA,a natural gas and electric utility serving eastern half ofPennsylvania; and UGI Enterprises, a supplier of energy services.UGI Utilities, which will be divested, provides gas service to258,000 customers in 14 eastern and southeastern counties inPennsylvania, and electric service to 61,000 customers in twonortheastern counties. UGI Enterprises will be folded into themerged company. It is involved in the GASMARK venture, whichmanages delivery of natural gas to more than 900 commercial andindustrial 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 andimaging products, packaging systems and sanitary-maintenancesupplies in North America. Unisource and UGI had combineddistribution sales of about $8.8 billion in fiscal 1998.

UGI plans to reinvest the cash proceeds from the sale of UGIUtilities in the distribution businesses of the combined company.Revenues from UGI’s propane business for fiscal 1998 were more thandouble ($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 ofapproximately $220 million. “It’s a very strong utility…a veryprofitable utility.” UGI “will get at least twice book” for UGIUtilities, said Tirello, but he doubted it could get three timesbook value. “They’re not in that position.” UGI said it plans tosell off the utility unit once the merger is completed, which itanticipates 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 ofthe New York or New Jersey or other Pennsylvania local distributioncompanies, or it can be picked up by an electric too.” Possibleinterested parties will be Pennsylvania Power &amp Light, GPU,Consolidated Edison, Equitable Gas “and all the other local guys inthe neighborhood,” said Tirello.

Under the merger agreement, UGI will exchange 0.566 common shareof UGI stock for each Unisource Worldwide share. Based on theclosing stock prices on Feb. 26 (just before the boards approvedthe 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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