Florida-based FPL Group Inc., the largest power company in oneof the fastest growing states, has agreed to buy New Orleans-basedEntergy Corp. for $13.9 billion in stock and assumed debt to formthe largest utility in the United States. When the deal is done,the new company will serve 6.3 million customers and have acombined generating capacity of more than 48,000 MW.

The merger, approved by both companies’ boards, is expected tobe completed in about 15 months. The combined company will have avalue of $27 billion, with $16.4 billion in stock marketcapitalization and $10.7 billion in debt and preferred stock. FPLGroup shareholders will own 57% of the new company, and Entergyshareholders will own 43%.

FPL owns power plants in Maine and Florida, and has windmillgenerators in Texas. Entergy owns electric utilities in Arkansas,Louisiana, Mississippi and Texas, along with projects in Europe, SouthAmerica and Australia. Entergy also has been buying nuclear plantsalong the East Coast of the United States (see Daily GPI, July 14, 1999).

“This is a fine match,” said Deutsche Banc Alex Brown analystEdward Tirello. “The earnings outlook of 10% growth beginning in2002 (when the merger is expected to be finalized) is excellent,and I like the fact that there will be 48,000 MW. There’s alsogoing to be a huge excess cash flow from this, which will helptheir growth plans. It looks pretty good.” He said there was nodownside to the merger from what each were bringing to the table,and he was high on what the new Entergy team will bring to FPL.”Entergy has exceptionally good management, and FPL will benefitfrom that,” he said.

FPL CEO James Broadhead will chair the new company, whileEntergy CEO Edwin Lupberger, who was brought in in 1998, will bethe new CEO. Broadhead has said recently that he may retire inabout two years.

The combined company will become one of the largest independentpower producers in the country, with nearly 10,000 MW of unregulatedgenerating capacity. Through Entergy’s pending venture with KochIndustries (see Daily GPI, April 25),the new company will be one of the largest U.S. marketers of bothnatural gas and electric power, owning 10,000 miles of strategicnatural gas pipeline assets. It also will become a market leader inweather derivatives.

The merger could prompt Entergy and Koch Industries, with whomit has a business venture, to carry out an expansion of KochGateway’s pipeline system into the Florida market, the mergerpartners said.

Entergy has been on the rebound in the past two years, sellingbillions in mostly foreign assets and investing most of that moneyinto new businesses. It sold London Electricity PLC for $2.9 billionin 1999, and also bought two New York Power Authority nuclear plantsin 1999 for $967 million. Entergy became the first utility to buy aU.S. nuclear plant when it purchased the Pilgrim facility inMassachusetts for $80 million. It owns five nuclear plants, and hasindicated it wants to buy more (see Daily GPI, Dec. 7, 1999). Last year, it had revenueof $8.8 billion and net income of $613.9 million.

FPL has remained mostly a regional utility, but it is gainingcustomers faster than most because of its location in Florida. Thecompany owns energy operations from Maine to California, but mostof its revenues come from its utility subsidiary Florida Power& Light, which generates more than 18,000 MW of electricityfrom oil, gas and nuclear power. It currently sells electricity to3.8 million customers in Miami and along Florida’s eastern coastand the southern part of the state. Subsidiary FPL Group Capitalfunds its nonutility holdings.

FPL Energy manages the unregulated energy businesses, withprojects that generate more than 3,000 MW in 13 U.S. states andColombia. It also wholesales natural gas, oil and electric power.FPL also is now the largest U.S. producer of wind electricity. InJuly, it agreed to build and operate 242 wind turbines in westernTexas for TXU Corp.

Last year, FPL bought some plants in Maine for $845 million (seeDaily GPI, March 12, 1999). It also isspending $225 million to expand fiber optic networks alongtransmission rights of way. It had sales of $6.4 billion and netincome of $712 million last year.

The merger is expected to grow the natural gas and electricitytrading business that Entergy has created, including deals with KochIndustries Inc. and The Shaw Group. The Koch Industries venture,announced in April, will have more than $6 billion in annual revenueand $1 billion assets. The Shaw Group wholesale power market deal willprovide management, engineering, procurement, construction andcommissioning services to build electric power plants (see Daily GPI,June 5). Still unnamed, the new companywill be headquartered in Juno Beach, FL,

In the deal, Entergy investors will receive 0.585 FPL share foreach of their shares, for a total of about $7 billion. The offer isvalued at $30.90 per share, which is about 1.9% more than Entergy’sclosing price on Friday (July 28). FPL assumes $6.9 billion in debtand preferred stock. FPL will purchase $570 million of its sharesbefore the acquisition, and Entergy will buy back $430 million.

The merger did not sit well with Wall Street yesterday, asshares of FPL dropped. Entergy, which had begun to rebound afterits sell-off of foreign investments in 1999, also watched as itsstock fell yesterday. Tirello said the drop of both stocks wasnormal.

“It’s going to take 15 months for anything to happen, and weknow that for the next 15 months, nothing else is going to happenat these companies, so the hot money isn’t there,” said Tirello.Deutsche Banc Alex Brown placed Entergy as a “buy” and FPL as a”hold” yesterday.

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