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Scarcity of Suitable Gas Partners Driving M&As

March 8, 1999
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Scarcity of Suitable Gas Partners Driving M&As

The pace of announced mergers and acquisitions (M&ampA) has picked up steam in the last few weeks because electric utilities are realizing that the pool of potential natural gas targets is quickly dwindling, according to a Merrill Lynch &amp Co. report.

"We expect M&ampA activity to continue and to possibly even accelerate as the list of potential partners becomes scarce...Large electric utilities hoping to become national energy players and compete with the Enrons, [CMS Energy] and the Dukes of the world are facing the very real possibility that the pool of potential partners may be decreasing," the investment company said in a Feb. 23rd report.

Merrill Lynch Vice President Rebecca Followill likened the merger pace to the children's game of musical chairs. "It begins very slowly. But as the chairs start to get pulled away, the excitement [and pace build] because only so many chairs are remaining." The excitement's especially acute now for the big electrics - such as Southern Co. - that haven't yet picked from the diminishing pool of gas partners. This "scarcity factor" is what's driving the current "frenzied pace" of M&ampA activity, she said.

In recent weeks, five of the companies followed by Merrill Lynch have been involved in M&ampA activity. "Three as targets [KN Energy, Consolidated Natural Gas and Public Service Co. of South Carolina] and one as an acquirer [Sempra Energy]," and for an "encore" there was a third-party competitive bid by Southern Union for Southwest Gas Corp.

Electric companies "will continue to be the major buyers of natural gas assets," according to Merrill Lynch. As to potential suitors, Followill said, "just look to the people who are divesting large amounts of generating assets. They will have the cash to spend."

Gas companies that are likely to be targets - or possibly even suitors - are Columbia Energy, Equitable Resources, National Fuel Gas, Questar Corp., Coastal Corp., El Paso Energy and Sonat, according to Merrill Lynch. "With the entire energy sector out of favor due to the significantly warmer-than-normal temperatures, depressed commodity prices and the general negative investor sentiment, we believe many of these companies can be bought for attractive prices."

And with these M&ampAs will come a smaller industry. About 10 years ago there were about nine publicly traded pipelines and 11 integrated gas companies; today there are five pipelines and four integrated companies, according to Merrill Lynch. "We continue to believe the group will consolidate further."

Susan Parker

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