Just as McDonald’s ambition when it first started out was toserve one million customers, Eastern Enterprises – which last weekannounced plans to acquire its third gas distribution company inless than a year – says its immediate goal is to serve one millionnatural gas customers in New England.
Weston, MA-based Eastern Enterprises, already the largest gasdistributor in New England, signed a definitive agreement to buyEnergyNorth Inc. of Manchester, NH, giving it a foray into the”very economically strong” gas market in the southern part of NewHampshire and pushing it close to the one-million mark. The dealcaused a lot of activity on Wall Street, with EnergyNorth stockjumping from $29.69/share just prior to the announcement onThursday to above $43/share early Friday.
The transaction comes on the heels of Eastern Enterprisespurchase of Essex Gas last September and its pending acquisition ofColonial Gas, which was approved by Massachusetts’ regulators lastweek, but still awaits an okay from the Securities and ExchangeCommission (SEC). Both distributors serve northeasternMassachusetts and Cape Cod.
“I think that this [latest] transaction along with other onessimilar to it are just baby steps,” said Donato Eassey, first vicepresident of Merrill Lynch, which is advising Eastern Enterpriseson the EnergyNorth deal. “What I mean is that these companies thatare combining today will have to become part of an even biggerentity down the road” to remain competitive. “They [EasternEnterprises] clearly have a strategy to go down that road.”
Even if the EnergyNorth and Colonial Gas deals get the neededapprovals, Eastern Enterprises will not be considered “large bywhat tomorrow’s standards are going to look like,” the financialanalyst told NGI. In the intermediate term, companies will require”upwards of five million customers or so” to be competitive inenergy markets. “And in the longer term, it may be 30 millioncustomers.”
So for Eassey, Eastern Enterprises’ immediate goal of onemillion gas customers – although laudatory – isn’t enough fortoday’s energy market. “I have a lot of companies that have amillion customers, and they’re still not efficient enough.” Henoted the pressure to reduce costs is particularly strong in theNew England market.
The proposed acquisition of EnergyNorth, parent of EnergyNorthNatural Gas, for an “enterprise value” of $202 million in cash,stock and debt would give Eastern Enterprises about a 35% share ofthe gas distribution market in New England, said companyspokeswoman Jane W. McCahon. Eastern Enterprises – through itsBoston Gas and Essex Gas affiliates – currently serves 580,000customers in Boston, MA, and surrounding communities in eastern andcentral Massachusetts. The completion of the purchases ofEnergyNorth and Colonial Gas, which has an “enterprise value” ofabout $495 million, would raise its number of gas customers to morethan 800,000.
EnergyNorth’s 49% interest in an unregulated propane business,VGS Propane, also would provide Eastern Enterprises with access toan additional 15,000 customers in New Hampshire and 10,000customers in Vermont. Moreover, the company’s HVAC (heatingventilation and air conditioning) business, which caters toresidential customers, will be a “nice fit” with EasternEnterprises’ HVAC business, which serves commercial and industrialcustomers, said McCahon.
Eastern Enterprises said it expects to close the Colonial Gasdeal by Aug. 31st, and the EnergyNorth transaction within ninemonths subject to the approvals of shareholders and governmentagencies. Both deals have been okayed by the companies’ boards ofdirectors. EnergyNorth’s subsidiaries earned $5.7 million last yearon operating revenues of $116.5 million.
Under the terms of the agreement, EnergyNorth’s shareholderswould receive $47 for each share that they own, a 7% premium overthe price for EnergyNorth stock early Friday and 2.6 times thecompany’s book value as of March 31st. Based on the number ofEnergyNorth shares outstanding on March 31st, the transaction hasan equity value of $156 million, and calls for the assumption of$46 million of debt. EnergyNorth stockholders can receive eithercash, Eastern common stock, or a combination of both, in return fortheir shares.
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