Boston, MA 04/30/2014 (wallstreetpr) – Pepco Holdings, Inc. (NYSE:POM) and Exelon Corporation (NYSE:EXC) have agreed to a tie-up that will see about $6.8 billion changing hands. The deal becomes the largest transaction in the utility space this year in North America. The transaction will be all-cash, according to a joint statement by the companies.
Pepco is a regulated utility that serves Washington, Maryland and Delaware. The deal values the company at $27.25 per share, therefore, representing about 20 percent premium of the company’s closing price on Tuesday.
Adjustment in the U.S. utilities market
Many adjustments can be seen taking place or planned to take place in the U.S. utility market, especially in the energy sector. About $15 billion acquisition deals were transacted in the past year, and many more are lined up for this year. Utilities are giving in to acquisitions or acquiring smaller peers to take advantage of economies of scale. Therefore, in the latest deal Exelon will gain more than 2 million energy customers by taking over Pepco. Moreover, the deal will significantly expand the company’s service area in the eastern U.S. region while helping it to reduce costs.
According to Exelon CEO Chris Crane, the deal with Pepco Holdings, Inc. (NYSE:POM) reflects the company’s efforts to grow while keeping costs and expenses low. The company also expects the transaction to enhance its customer experience. Furthermore, the company will enjoy steady and regular revenue thanks to the regulated business of Pepco.
Price issues in the U.S. energy sector
The surge in natural gas supply has eroded prices. The environment of weak prices means weaker revenue from electricity sales given that the market is flooded. Because of the soft demand and overwhelming supply of natural gas, impact on the revenue and profits led Exelon to trim its quarter dividend. That happened for the first time in the company’s history, and it was mainly due to a drop in electricity rates especially for the nuclear plant.
However, adding Pepco Holdings, Inc. (NYSE:POM) to its portfolio will help Exelon to reduce the impact of the wholesale power merchant market. Moreover, a deal with Pepco is viewed as one of a kind. In any case, there are not many such opportunities available today.
In conclusion
Mr. Crane will lead the combined company after the deal with Pepco Holdings, Inc. (NYSE:POM) closes sometime in the second or third quarter of next year. The combined company will immediately look into the costs and efficiency issues. A joint statement by the two companies stated that current Pepco CEO Joseph Rigby will stay at Pepco until the deal is closed. Mr. Rigby had previously announced his retirement plan.
