Wisconsin Energy Corp., a Milwaukee, WI-based utility holdingcompany, kicked off the merger merry-go-round last week when itannounced plans to acquire WICOR Inc., the parent of a rival gasdistributor, for about $1.51 billion in cash, stock and debt,creating a major Midwest energy concern and the 13th largestutility in the nation.

The definitive merger agreement, which was approved by theboards of directors of both companies, would establish an energycompany with a combined market capitalization of about $7.3billion, including $4.5 billion in equity and $2.8 billion in debtand preferred stock. The deal would be accounted for as a purchaseand is expected to be accretive to earnings during 2001.

The transaction would shore up the gas distribution business ofWisconsin Energy by merging the gas operations of its combinedutility, Wisconsin Electric, with the state’s largest gasdistributor, WICOR’s Wisconsin Gas. The deal would not involve thecombination of any electric assets. The merged company would haveabout 921,000 natural gas customers in Wisconsin and more than onemillion electric customers in Wisconsin and Michigan’s UpperPeninsula.

By adding WICOR’s gas customer base to its own, Wisconsin Energywill have “the size, scope and skills needed to compete in theemerging regional energy market and a solid platform for continuedgrowth,” said Richard A. Abdoo, who will continue as chairman,president and CEO of Wisconsin Energy.

Also, the acquisition would provide Wisconsin Energy an avenuefor growth in the non-utility sector through WICOR’s pumpbusinesses, which accounted for almost half of the company’s $45million in earnings and $944 million in revenues last year,industry analysts said. They project an annual growth rate forWICOR’s pump operations of 15%-plus.

The proposed acquisition elicited kudos from analysts. “I thinkit was a brilliant move myself. Wisconsin Energy [and WICOR] bothserve in the same state. It makes a tremendous amount of sense asfar as savings go. The ratepayer will certainly save. Theshareholder will do well also,” said Edward Tirello, utilityanalyst for Deutsche Banc Alex. Brown. “Wisconsin Energy needs toexpand their non-utility base, and WICOR has that great pumpbusiness,” which has “already got an established base.”

WICOR subsidiaries manufacture pumps for a variety ofapplications, including swimming pools, spas, wells and sump pumps.Its Sta-Rite Industries and SHURflo Pump Manufacturing divisionssell the majority of their products through Sears and Home Depotstores. This is a “darn good business,” said Donato Eassey, firstvice president at Merrill Lynch. The products are “well knownnames.” This “certainly gives them [Wisconsin Energy] a much largergrowth platform on a relatively accretive basis,” he noted.

The news of the Wisconsin Energy-WICOR transaction rekindledmemories of Wisconsin Energy’s failed attempt to acquireMinneapolis, MN-based Northern States Power Co. three years ago.The $6 billion merger deal collapsed in 1997 after running intoproblems with Wisconsin regulators. But Wisconsin Electric andanalysts don’t expect to see a repeat of that scenario this timearound.

Wisconsin Energy already has held preliminary discussions withthe staff of the Wisconsin Public Service Commission on the merger,and its reaction was mostly favorable, said company spokesmanMichael John.

“I think this is a much simpler acquisition [than NorthernStates]. It doesn’t have the market-power issues on the electricside. It’s just a combination really of the gas distributionsystems, which are regulated and will remain regulated businesses.So I think that this should be fairly straightforward, and I thinkthe regulators should be able to approve it with a fair amount ofdispatch,” said Doug Fischer, senior electric utility analyst forAG Edwards in St. Louis, MO. The “expectation is that FERC approvalmay not be required as long as WICOR surrenders their electricmarketing license, which they’ve never used.”

Since its failed bid for Northern States, Wisconsin Energy hasnot been sitting by idly. Rather, it has been busy snatching upenergy assets in smaller merger transactions. It bought EdisonSault Electric Co., a small Michigan utility, for $71 million twoyears ago, and it has acquired a number of power plants in theNortheast.

Wisconsin Energy’s bid for WICOR did not take analysts bysurprise. “Our gas utility analysts have said, and we agree, thatalmost any gas distribution company is a potential target eitherthrough a combination with another gas company, or – as has beenhappening more frequently recently – with…..an electric utility,”AG Edwards’ Fischer noted. Deutsche Banc’s Tirello said his companypredicts there will be no free-standing gas distributors threeyears from now – they will have all been gobbled up by electricutilities.

Under the terms of the merger agreement, WICOR shareholders willreceive a fixed price of $31.50 for each share of stock that theyown, a 10% premium over the closing price of $28.13 for WICOR stockon Friday. Wisconsin Energy said at least 40% of the purchase pricewill be paid in stock, but the ratio could be raised to 60%, or itcould elect to pay all cash. Wisconsin Energy stock closed Fridayat 27 1/16.

Wisconsin Energy and WICOR expect the transaction to receive allthe necessary regulatory approvals and be completed by the springof 2000. Within the first full year of operation, they project thenew company will show savings of about $35 million. No layoffs areanticipated as a result of the deal, said Wisconsin Energy’s John.The headquarters for Wisconsin Energy will remain in Milwaukee,with WICOR becoming a wholly owned subsidiary.

Under the agreement, George E. Wardeberg, chairman and CEO ofWICOR, will become vice chairman of the board of Wisconsin Energy,reporting to Abdoo. He will continue in that position until heretires in two years.

Susan Parker

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