At Massachusetts’ Eastern Enterprises, “consolidation” is theword of the day, and of the days to come. Fresh from itsacquisition of Essex County Gas, the Boston Gas parent Monday saidit will buy nearby Colonial Gas Co. at a 27% premium to Colonial’sFriday closing price.

The companies agreed to merge Colonial into Eastern for $37.50per share in Eastern stock and cash. Based on Colonial sharesoutstanding Sept. 30, the deal values Colonial equity at $332million, and including outstanding debt has an enterprise value of$495 million. The price represents a 27% premium to Colonial’s Oct.16 closing price and is 2.66 times Colonial’s Sept. 30 book value.The transaction is not expected to be dilutive to Eastern’searnings, according to management.

“The merger with Colonial Gas is a significant step in theindustry consolidation strategy we have been pursuing for severalyears in order to achieve the economies of scale that will enableus to improve customer service, lower costs and build value for ourshareholders,” said J. Atwood Ives, Eastern CEO. “The Essex CountyGas acquisition was the first step and the Colonial Gas mergermarks the second step of this strategy…”

When this transaction is completed, Eastern’s combined gasdistribution companies will serve over 725,000 customers inMassachusetts. The deal will lead to about a 5% job reduction fromthe 2,000-member combined work force of Boston Gas, Essex, andColonial, said Colonial spokesman Brian Norris.

“I like it. I think it’s very doable,” Edward Jones analyst ZachWagner said of the deal. “Colonial’s shareholders are getting avery fair price, and I think Eastern will be able to recover thepremium through cost-cutting.” Wagner pointed to Colonial’scontiguous service territory as one plus for cost cutting. Systemmaintenance, back office operations such as meter reading andbilling, as well as management functions all lend themselves toconsolidation, he said. “I think there’s a significant opportunityto save a lot of costs. It could be a 10-year time frame beforethey get all of them out.” Some of the cost savings will go toratepayers, of course, and Wagner said he expects Eastern to seeksome sort of a rate freeze as the company did with Essex.

Wagner said he expects Eastern and others to be doing moreconsolidation deals. “We saw a flurry of them last December, and Ithink we’re going to see a lot more of them in the next couple ofmonths. I’m sure [Eastern will] continue to acquire, certainlywithin New England. There are a lot of fine gas utilities in thearea. The train’s not going to stop, not yet. Anyone that’spublicly traded is certainly a target. I think they all make senseto Eastern.”

Chet Messer, Eastern senior vice president and president ofBoston Gas, told NGI there will be a thinning of the herd of NewEngland LDCs. “Bottom line, I think economics and the need toprovide cost-effective service is going to get us down to three orfour.” He said this will happen over the next five to seven years.”

Colonial shareholders may elect either Eastern common stock orcash, with the total cash consideration fixed at $150 million.Shareholder elections will be prorated to maintain this mix ofconsideration. Based upon Eastern’s current share price ($43.375 asof Oct. 16) and Colonial’s outstanding shares, Eastern expects toissue about 4.2 million shares. The transaction is expected toclose by mid-1999.

Colonial, based in Lowell, MA, serves more than 150,000customers in 24 communities northwest of Boston and on Cape Cod(many of which are contiguous to towns served by Boston Gas andEssex Gas). Colonial also owns and operates Transgas Inc., theworld’s largest over-the-road transporter of liquefied natural gas,which will become a separate Eastern subsidiary. In its fiscal yearended Dec. 31, Colonial earned $16 million, or $1.87 per share, onoperating revenues of $187.1 million. Last month, Eastern completedits acquisition of Essex County Gas in a transaction with an equityvalue of $85 million and a total value of $113 million. Easternowns and operates Boston Gas, Essex County Gas, Midland EnterprisesInc. and ServicEdge Partners Inc.

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