Investment banking firm Merrill Lynch & Co. said Thursday it entered into a definitive agreement to buy the energy trading operations of Entergy-Koch LP., a joint venture of Entergy Corp. and Koch Industries Inc.
Terms and conditions of the transaction were not disclosed. The deal, which will require the approval of European and U.S. regulators (including the Federal Energy Regulatory Commission), is expected to close in the fourth quarter. It will be accretive to Merrill Lynch’s 2005 earnings and earnings per share without assuming any synergies, the New York-based company said.
New Orleans, LA-based Entergy previously said it expected the proceeds from the sale of the energy trading unit, as well as its natural gas pipeline and storage assets, to reap about $1 billion, noted company spokesman Morgan Stewart.
Entergy-Koch LP soon intends to initiate a competitive process to sell its 8,800-mile Gulf South Pipeline system that extends from southern Texas to western Florida, and its two storage facilities with a total working capacity of 68.5 Bcf. The company expects to conduct the bidding process in the third quarter, Stewart noted.
The acquisition of the trading business will enable Merrill Lynch to “offer a broader product offering to its major institutional clients, which include major corporations around the world, hedge funds and pension funds,” said Merrill Lynch spokesman Bill Halldin. Currently, the company has a “very small scale” energy trading operation, with only a “handful of employees,” he noted.
The Entergy-Koch trading unit has focused on natural gas, electricity and weather-related contracts. But Merrill Lynch said it anticipates making future investments to expand the business into other aspects of energy trading.
Upon completion of the transaction, the acquired energy trading business will operate as the Global Commodities group, a wholly owned unit within Merrill Lynch’s Global Markets & Investment Banking. The company will retain Entergy-Koch’s 300 energy trading employees at its offices in Houston, TX, and in London, according to Halldin.
The deal seems to confirm reports that the domestic energy trading market, which shrank following the collapse of Enron Corp. and the exodus of major traders, is re-gaining some strength. Investment banking firms Morgan Stanley and Goldman Sachs, and now Merrill Lynch, are picking up where failed energy merchants left off (see Daily GPI, Aug. 25). Credit Suisse First Boston (CSFB) also jumped into the market in May, when it and Dallas-based TXU Corp. took steps to form a new energy marketing and trading unit (see Daily GPI, May 19). Meanwhile, Duke Energy has said it is open to partnering its troubled merchant unit, Duke Energy North America, with someone with deep pockets, preferably a bank (see Daily GPI, June 15).
Standard & Poor’s Rating Services said Thursday the Entergy-Koch purchase would have no impact on its credit ratings of Merrill Lynch. It noted the deal will be funded by Merrill with internal cash. “Standard & Poor’s does not view the financial impact of this acquisition as material, although the elevated risks associated with energy trading will be a subject that will bear close monitoring,” it said.
“This acquisition may be the beginning of a build-out of the energy trading business in general,” noted the credit ratings agency. While Merrill is not acquiring the gas pipeline and storage assets as part of the deal, Standard & Poor’s said it plans to discuss with the company the “likelihood of future acquisitions and investments in this area.”
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