Wall Street was awash in reports Monday that Akron, OH-basedFirstEnergy Corp. was negotiating to acquire GPU Inc. ofMorristown, NJ, for more than $10 billion in a transaction thatwould create one of the top energy utility companies in the nation.

The boards of directors of both energy companies were to havemet yesterday to discuss the potential marriage, with some industryanalysts expecting an announcement by either late Monday orsometime today.

But some weren’t so sure, noting that FirstEnergy apparentlywasn’t the only suitor eyeing GPU. “I’ve also heard somebody elseis looking at GPU. It’s a British company, National Grid Group,which recently in the last six months has bought a couple ofthings” in the United States, said S. Lee Walter, a researchanalyst with Fahnestock & Co. in Kansas City. In March,National Grid acquired the New England Electric System (NEES) for$3.2 billion.

But the fact that boards of FirstEnergy and GPU were in talksgave other analysts reason to believe that a pairing of thecompanies was in the offing. “An announcement is expected probablytomorrow [Tuesday] if they can get together. My guess is theyprobably will,” said Thomas Hamlin, utility analyst with FirstUnion in Richmond, VA.

“The market is certainly telling us that [they will gettogether] as well. The market is saying they’re down 8% onFirstEnergy and up 8% on GPU’s stock price, which is typical”preceding a merger pronouncement, according to Hamlin. In earlytrading yesterday, FirstEnergy’s per-share price was $24.63, down$2.31, while GPU’s per-share price was $30.31, up $2.25. FirstEnergy ended the day down $1.55 to $25.39, while GPU closed up$2.64 to $30.70.

Although all the signs pointed to a FirstEnergy-GPU union,Hamlin would not commit to it as an absolute certainty. “What I’msaying is if they were to do this deal, it makes a lot of sense.” Amerged FirstEnergy-GPU would have 4.2 million customers, making itthe “top five or so” utility in the electric industry, and wouldhave a combined market capitalization of $10.3 billion, he toldNGI. Reports of how a FirstEnergy-GPU merger deal, if reached,would be structured were split between a cash-and-stock deal and astock-and-debt transaction.

For Hamlin, a merger between FirstEnergy and GPU would be a goodfit. “FirstEnergy has made a big move into Pennsylvania and NewJersey, which is where GPU serves, and [is] selling in thederegulated marketplace. This [would help] them along that way.FirstEnergy [also] has a lot of baseload capacity, which GPU hasnone. So it [a merger] helps in that area. And it also helps intheir [non-regulated] businesses. GPU recently acquired amechanical services contracting company, called the Myr Group.FirstEnergy is also very big in that business. So there’s somenatural synergies there as well,” he said. FirstEnergy has acquired12 mechanical construction, contracting and energy managementcompanies, with annual sales exceeding $445 million.

Despite reports that other suitors may be eyeing GPU,Fahnestock’s Walter believes a FirstEnergy-GPU marriage would “makea lot of sense” because the utility companies serve contiguousmarkets. “FirstEnergy’s looking to build their customer base.They’ve successfully competed in Pennsylvania and New Jersey, andthey’re really looking at that corridor…..There seems to be a lotof reasons why it would make sense. I haven’t run the numbers onthem so I can’t from a financial standpoint say this [merger] isabsolutely brilliant or not.”

FirstEnergy, a diversified energy holding company, has fourelectric utility companies — Ohio Edison Co., Pennsylvania PowerCo., The Illuminating Co. and Toledo Edison Co. — which combinedmake up the nation’s 10th largest investor-owned electric system,serving 2.2 million customers in northern and central Ohio andwestern Pennsylvania.

FirstEnergy has $6 billion in annual revenues and more than $18billion in assets. It has 16 power plants that produce about 12,000MW, and it owns about 60,000 miles of transmission and distributionlines, and 35 interconnects and six regional electric systems. Thecompany markets about 62 billion kilowatt-hours of electricity eachyear.

The Ohio energy company also provides natural gas service toabout 50,000 retail customers, and is involved in the explorationand production of oil and gas, as well as gas transportation andmarketing. Specifically, it has interests in more than 7,700 oiland gas wells, owns oil and gas drilling rights to about onemillion acres in the Appalachian Basin, has 450 Bcf equivalent ofproved reserves (90% of which are gas), and 5,000 miles ofpipelines.

In the United States, GPU Inc. has three electric utilitysubsidiaries — doing business as GPU Energy — that serve twomillion customers in Pennsylvania and New Jersey. GPU AdvancedResources Inc. sells retail energy and services in the Mid-Atlanticregion. It also owns transmission and distribution facilitiesoverseas, where it caters to an additional 2.3 customers.

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