Just as McDonald’s ambition when it first started out was toserve one million customers, Eastern Enterprises-which yesterdayannounced 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, reported it signed a definitiveagreement to buy EnergyNorth Inc. of Manchester, NH, giving it aforay into the “very economically strong” gas market in thesouthern part of the state and pushing it close to the one-millionmark. This comes on the heels of its purchase of Essex Gas lastSeptember and its pending acquisition of Colonial Gas, which isawaiting approval from Massachusetts’ regulators. Both distributorsserve northeastern Massachusetts 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” in order to compete. “They [EasternEnterprises] clearly have a strategy to go down that road.”
Even if the EnergyNorth and Colonial Gas acquisitions get theneeded regulatory approvals, Eastern Enterprises will not beconsidered “large by what tomorrow’s standards are going to looklike,” the financial analyst told NGI. In the intermediate term,companies will require “upwards of five million customers or so” tobe competitive in energy markets. “And in the longer term, it maybe 30 million customers.”
So for Eassey, Eastern Enterprises’ immediate goal of onemillion gas customers-although laudatory-isn’t enough for today’senergy market. “I have a lot of companies that have a millioncustomers, and they’re still not efficient enough.” He noted thepressure to reduce costs is particularly evident in the New Englandmarket.
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 its BostonGas and Essex Gas affiliates-currently serves 580,000 customers inBoston, MA, and in 90 other eastern and central Massachusettscommunities. The completion of the purchases of EnergyNorth andColonial Gas, which has an equity value of about $332 million,would raise the number of its gas customers to more than 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, Eastern Enterprises’ HVAC (heatingventilation and air conditioning) business, which serves commercialand industrial customers, will be a “nice fit” with EnergyNorth’sHVAC business, which caters to residential customers, said McCahon.
Eastern Enterprises said it expects to close the Colonial dealby the end of the third quarter, and the EnergyNorth transactionwithin nine months subject to the approvals of EnergyNorthshareholders, the Security and Exchange Commission and NewHampshire regulators. The proposed purchase of EnergyNorth alreadyhas been approved by the boards of directors of both companies.Once the merger is completed, EnergyNorth’s distributioncompany-EnergyNorth Natural Gas-will become a wholly-ownedsubsidiary of Eastern Enterprises, and its unregulated businesseswill operate as separate subsidiaries.
Under the terms of the agreement, EnergyNorth’s shareholderswould receive $47 for each share that they own, a 58% premium overthe closing price for EnergyNorth stock on Wednesday and 2.6 timesthe company’s book value as of March 31. 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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