Officials at Potomac Electric Power Co. (Pepco) would notconfirm nor deny a report in The Wall Street Journal last week thatPepco has made an offer to buy Delaware-based Conectiv Inc. for $2billion in cash and stock. A spokesman said it might be a good ideato check back with the Washington, D.C.-based utility this week.The Journal reported the deal would be announced within a few days.
Conectiv apparently has been out secretly shopping itself forsome time. Suffering from undervalued stock and competitivepressures due to deregulation, the Wilmington, DE-based utilitycompany would make a smart addition to its regional neighbor,Pepco, which is undergoing some of the same pressures and has asimilar business strategy.
Pepco is expected to make an offer, half cash and half stock,that would value each Conectiv share at $25, a 19% premium as ofthe close of trading yesterday. Pepco also is expected to assume $3billion in Conectiv debt. Conectiv shares rose nearly 10% yesterdayto $20.99, while Pepco shares fell 4% to $20.59.
Conectiv is the parent of Delmarva Power & Light Co. andAtlantic Energy Inc., serving more than 1.1 million customers inDelaware, Maryland, New Jersey, Pennsylvania, and Virginia. Pepcodelivers electricity to 1.9 million people in Washington, D.C., andmajor portions of Prince George’s and Montgomery counties insuburban Maryland. Last year Pepco’s revenue rose 6% to $2.62billion and its net income rose 45% to $346.5 million. Conectivreported 2000 earnings of $2.10/share before nonrecurring chargesand gains, which was an increase of 11% over 1999 earnings.
Pepco attempted expansion before in late 1997, but it aborted aproposed $3 billion merger with Baltimore Gas & Electric, nowpart of Constellation Energy. Pepco sold its power generationassets last year to Mirant Corp., formerly Southern Energy Inc.
Pepco and Conectiv have developed similar strategies, includingstart-up telecommunications businesses, energy services and retailmarketing, but both seek improved financial support for expansion.The trend among deregulating electric companies is to merge andform larger transmission units, which would be particularlyattractive in the Mid-Atlantic where there is rapid demand growth.
In addition, Conectiv, which was formed three years ago by themerger of Atlantic Energy and Delmarva Power, has suffered frompoor stock valuations and has had limited success pursuing itsdiversification strategy. It currently is pursuing merchantgenerating plant development in its region and is in the process ofselling plants that don’t fit its “midmerit” strategy of moderateoperating costs while adding 4,000 MW of new generation in theregion.
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