Although dwarfed by the news of the proposed NiSource-Columbiamarriage, LG&E Energy Corp. had some glad tidings of its ownlast week — it signed off on a definitive merger agreement forBritain’s PowerGen plc to acquire the Louisville, KY-baseddiversified energy company in a cash-and-debt transaction valued at$5.4 billion.

PowerGen said it agreed to pay $3.23 billion in cash — $24.85for each LG&E Energy share held, which was a 58% premium abovethe closing price of about $15.75 on Feb. 25 — and to assume $2.2billion of the electricity and natural gas concern’s debt. LG&EEnergy’s stock rose by about $7/share last week in the wake of theannounced merger deal. The per-share price offered by PowerGen wasabout equal to the 52-week high of 22 1/8 for LG&E Energy’sstock, analysts said.

The transaction provides PowerGen with an immediate foray intothe U.S. energy market and a “strong platform” for future growth,while it offers LG&E Energy “an immediate opportunity toprovide significant value to [its] shareholders now,” saidLG&E Energy Chairman Roger Hale at a press briefing on Monday.

“Even though LG&E Energy is now nearly five times its sizeof 10 years ago, we are limited in our ability to continually makea significant impact on the current market, and then deliver theyear-after-year increasing growth rates now demanded by investors,”he told reporters. But Hale expects the merger with PowerGen tochange this.

PowerGen is considered one of the top independent power projectdevelopers in the world, and is ranked among the leading integratedelectricity and gas companies in the United Kingdom. Currently, thecompany is involved in 11 power projects around the world. It has amarket capitalization of $4.1 billion, while LG&E Energy’smarket cap is $2.84 billion.

If PowerGen succeeds in its acquisition of LG&E Energy,analysts in the U.S. and overseas agree it will have made anexcellent purchase. LG&E Energy is “probably one of the bestutilities in the Midwest,” said Edward Tirello, utility analyst forDeutche Banc Alex. & Brown in New York. “It’s a low-costproducer [of electricity]. It’s a very attractive property, [and]very centrally located.” Additionally, LG&E Energy has a”substantial number of megawatts,” about 10,000 MWs, and a “verynice” customer base, he noted.

For these reasons, Tirello doesn’t think the bidding on LG&EEnergy is quite over yet. “I think there’s a very good chance nowthat there’s a price on the table…..the neighbors will look at ita lot more closely,” he told NGI. He believes the odds are “50-50″that PowerGen will own the company in the end.

PowerGen has actively pursued LG&E Energy because it servesthe Midwest, “an area that represents around 25% of the U.S.electricity market and where further consolidation is expected,”according to a PowerGen statement. “The acquisition will givePowerGen a strong foothold in this market,” it added. “Of all theopportunities we have looked at, this is the one that has thegreatest potential,” said PowerGen Chairman and CEO Ed Wallis.

Energy analysts in London, however, were concerned about thelarge debt load that PowerGen will amass by acquiring LG&EEnergy. It’s estimated the debt of PowerGen will balloon to about(U.S.) $8 billion.

To reduce the load, PowerGen indicated it plans to sell off a”whole bunch” of the company’s assets., according to Tirello. The”selected asset disposals” will occur in the UK andinternationally. Also, if successful in its acquisition effort,PowerGen likely will sell off LG&E Energy’s non-core assets,”which is kind of a shame” since it’s a “very good company and hasvery cheap power,” Tirello said.

This marks PoweGen’s third attempt to break into the U.S.market, according to Tirello. It was unsuccessful in its two triesin 1998 to merge with Houston Industries Inc., which has beenre-named Reliant Energy Inc. LG&E’s Hale indicated PowerGen andLG&E Energy have been in merger talks since last July.

A combined PowerGen-LG&E Energy would have assets of nearly$12 billion and total revenues of $8.7 billion. It would servenearly four million energy customers worldwide, including 800,000customers (285,000 gas and 515,000 electric) in Kentucky. LG&Ehas two regulated utility subsidiaries — Louisville Gas andElectric, and Kentucky Utilities Co., which merged in the spring of1998 — serving the state and parts of Virginia. APowerGen-LG&E Energy company would have operations on fivecontinents and the Indian sub-continent, own 20 gigawatts ofgeneration capacity and have more than 64,000 miles of transmissionand distribution facilities.

The two merger partners expect the transaction to close in early2001. The deal is subject to state and federal regulatory approvalsin the U.S., as well as the approvals of the companies’shareholders.

Upon completion of the merger, LG&E Energy’s would become awholly owned subsidiary of PowerGen. The names of LG&E Energyand its subsidiaries would remain the same, and LG&E Energywould continue to be headquartered in Louisville – where it wouldserve as the U.S. operations for PowerGen.

Hale would remain chairman and CEO of LG&E Energy, and wouldbecome a member of PoweGen’s board of directors in London. Also,LG&E Energy’s current management team and structure, as well asits union contracts, would be unaffected by the proposed merger,PowerGen said.

Susan Parker

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