The pace of announced mergers and acquisitions (M&ampA) haspicked up steam in the last few weeks because electric utilitiesare realizing that the pool of potential natural gas targets isquickly dwindling, according to a Merrill Lynch &amp Co. report.

“We expect M&ampA activity to continue and to possibly evenaccelerate as the list of potential partners becomes scarce…Largeelectric utilities hoping to become national energy players andcompete with the Enrons, [CMS Energy] and the Dukes of the worldare facing the very real possibility that the pool of potentialpartners may be decreasing,” the investment company said in a Feb.23rd report.

Merrill Lynch Vice President Rebecca Followill likened themerger pace to the children’s game of musical chairs. “It beginsvery slowly. But as the chairs start to get pulled away, theexcitement [and pace build] because only so many chairs areremaining.” The excitement’s especially acute now for the bigelectrics – such as Southern Co. – that haven’t yet picked from thediminishing pool of gas partners. This “scarcity factor” is what’sdriving the current “frenzied pace” of M&ampA activity, she said.

In recent weeks, five of the companies followed by Merrill Lynchhave been involved in M&ampA activity. “Three as targets [KNEnergy, Consolidated Natural Gas and Public Service Co. of SouthCarolina] and one as an acquirer [Sempra Energy],” and for an”encore” there was a third-party competitive bid by Southern Unionfor Southwest Gas Corp.

Electric companies “will continue to be the major buyers ofnatural gas assets,” according to Merrill Lynch. As to potentialsuitors, Followill said, “just look to the people who are divestinglarge amounts of generating assets. They will have the cash tospend.”

Gas companies that are likely to be targets – or possibly evensuitors – are Columbia Energy, Equitable Resources, National FuelGas, Questar Corp., Coastal Corp., El Paso Energy and Sonat,according to Merrill Lynch. “With the entire energy sector out offavor due to the significantly warmer-than-normal temperatures,depressed commodity prices and the general negative investorsentiment, we believe many of these companies can be bought forattractive prices.”

And with these M&ampAs will come a smaller industry. About 10years ago there were about nine publicly traded pipelines and 11integrated gas companies; today there are five pipelines and fourintegrated companies, according to Merrill Lynch. “We continue tobelieve the group will consolidate further.”

Susan Parker

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