Massachusetts’ Eastern Enterprises clearly has embraced theconcept of consolidation and is doing deals to prove it. Fresh fromits acquisition of Essex County Gas, the Boston Gas parent lastweek said it will buy nearby Colonial Gas Co. for nearly half abillion in stock, cash, and assumed debt. The deal grants a 27%premium to Colonial’s closing price preceding the deal’sannouncement.

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 deal’s announcement came almost three weeks after Easternacquired Essex for $113 million. That deal was challenged,unsuccessfully, by the Massachusetts’ attorney general, who said itwould not yield adequate savings to customers.

“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 to realize the benefits ofconsolidation in this highly-fragmented market.

“Colonial Gas is a well-managed, fast-growing company that willprofit from the synergies of the merger, as well as Eastern’sfinancial strength. When this transaction is completed, Eastern’scombined gas distribution companies will serve over 725,000customers in Massachusetts.”

The deal will lead to about a 5% job reduction from the2,000-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 timeframe before theyget 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. Essexcustomers were promised a 5% drop in gas prices and a 10-yearfreeze of base rates.

Wagner said he expects Eastern and others to do 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.”From our standpoint, we hope it’s sooner than that. Since 1993,we’ve made it clear that we think there ought to beconsolidations.”

In December, Eastern opted out of the unregulated marketingbusiness, announcing the sale of its 50% interest in AllEnergyMarketing Co. to New England Electric System (NEES), which had beenEastern’s joint venture partner. It cited the uncertainties ofunbundling and the need to finance other strategic alternatives.”Our expertise is in the distribution of natural gas, and we’llstay focused on that,” Ives said at the time.

Joe Fisher, Houston

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