With few clues as to what the holdup could be, FPL Group Inc.and Entergy Corp. said Monday in a joint statement that “certainissues have arisen in connection with their pending merger,” andthat they would meet in the “near future” to address the problems.The merger, announced last July (see Daily GPI, Aug. 1, 2000), wasscheduled to close this fall.

Those issues, relating to “governance structure/value-relatedissues and integration of the two companies going forward,”appeared to just about cover the ballpark. “The parties will haveno further comment on the status of the merger at the presenttime.”

If the stock-for-stock deal does go through as approved by bothboards’ shareholders in December, it would create the largest powerdistributor in the United States. FPL shareholders were expected toown 57% of the stock, with Entergy shareholders holding theremaining stock.

The deal, valued at about $6.3 billion at the time, called foreach holder of FPL common stock to receive one share of the newholding company for each share of FPL common stock. Entergyshareholders would receive 0.585 of a share of the new holdingcompany for each share of Entergy common stock. As of yesterday,the merger process continued to proceed through the regulatoryprocess.

In reaction to Monday’s announcement, Lehman Brothers downgradedEntergy shares to “buy” from “strong buy.” Analyst Daniel Fordsaid, “due to lack of information surrounding this disclosure, wedo believe that there is real potential for share priceover-reaction.” In a research note, Lehman analyst Allyson Orlandosaid, “while details were sketchy, the companies cited corporategovernance, valuation, and integration issues as points ofcontention. We view this development as damaging to our investmentthesis.”

Since the merger announcement last year, both companies’ valueis considerably higher, with FPL’s market cap estimated to haverisen to $11 billion from $9.4 billion and Entergy’s market capestimated at $8.2 billion, up from $7 billion.

According to the merger agreement, if one wants to end themerger before it is completed, it would have to pay the other $215million. However, if the merger did not close by April 30, 2002,they could both withdraw without penalty.

Current Entergy CEO J. Wayne Leonard is to become CEO of thecombined company and FPL CEO James Broadhead would become chairman.The new corporate headquarters is to be in Juno Beach, where FPL isnow headquartered, while the utility group’s headquarters would bein Entergy’s current headquarters in New Orleans. FPL would haveeight of the 15 board members.

Last month, an administrative law judge moved hearings scheduledat the Louisiana Public Service Commission to this July, reversingan earlier judgment that would have delayed the merger into 2002.The companies have already submitted filings to the Federal EnergyRegulatory Commission and regulators in Arkansas, Texas, Louisiana,Mississippi and New Orleans requesting approval. They also willneed approval from the Securities and Exchange Commission and theNuclear Regulatory Commission.

Another company that could be affected if the merger does notproceed is The Shaw Group, based in Baton Rouge, which is in ajoint venture with Entergy to build its new power plants (see DailyGPI, June 5, 2000). Fritz von Carp, a Merrill Lynch analyst, saidin a research note yesterday that without the merger, Shaw’srevenue would be down.

“This is significant for Shaw because it has a joint venturewith Entergy to build all of Entergy’s new power plants,” von Carpwrote. However, he added that Shaw was projected to make only 10%of its revenue in fiscal year 2002 from Entergy-FPL projects, andalthough those projects now were in doubt, “the market remainsrobust, and Shaw’s immediate challenge has been capacity and notdemand for its services.”

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