Acquisitions appear to be the safest bet for the nuclear
fueled energy supplier
) to further expand its footprint in the U.S. Exelon has decided
Pepco Holdings Inc.
), one of the largest energy delivery companies in the
Mid-Atlantic region, in an all-cash transaction. Exelon will
invest nearly $7 billion to acquire Pepco Holdings. The
company aims to close the deal in the second half of 2015,
subject to the receipt of necessary approvals including that of
Big Deals in the Utility Space
This is the second multi-billion dollar deal for Exelon in the
span of two years. In 2012, Exelon acquired Constellation Energy
for nearly $8 billion.
The utility space has seen another multi-billion dollar deal
in the last couple of years.
Duke Energy Inc
) acquired Progress Energy for nearly $26 billion, to form the
largest electric utility in the U.S. surpassing Exelon.
The similar business models of Exelon and Pepco and existing
assets in close proximity will be an added advantage for the
merger. The Exelon management believes this merger will add
nearly 15 cents to 20 cents to the bottom line from the first
full year of joint operations.
Other Benefits for Exelon
The volatility in wholesale energy market prices is drawing
the utility operators more toward regulated operations. The
Exelon and Pepco merger will create a large utility business,
serving 10 million customers and having a rate base of nearly $26
billion. This rate regulated operations will provide an impetus
and further stability to earnings.
What Exelon Offers?
Exelon made an all cash offer of $27.25 per share for each
share of Pepco Holdings Inc. This offer is at a premium of 24.7%
to Pepco Holdings' closing price of $21.85 on Apr 25, 2014.
In addition, upon completion of the deal, Exelon will create a
fund of $100 million to provide benefits to legacy Pepco Holdings
Exelon's management is not too worried about the funding. This
transaction is supported by a fully committed $7.2 billion bridge
facility from two large financial organizations. Exelon expects
to fund the deal with a combination of equity issuance, long-term
debt and corporate cash, subject to prevailing market
The merger is subject to approval by the shareholders of Pepco
Holdings Inc. In addition, Exelon is required to seek regulatory
approvals from different state commissions to close the
The announcement of this deal led to an upward movement in the
traded price of Pepco Holdings Inc. The shares gained 17.4%
yesterday to close at $26.76. If we consider the Apr 25, price,
Pepco's shares reflect a gain of 22.5%. So, at yesterday's
closing price the premium to the offer price of $27.25 comes to a
mere 1.8%. This might not look so attractive to Pepco
To Sum Up
Exelon's shareholders have definitely taken a note of this
development as yesterday's trading volume is the highest year to
date. Even though the company failed to surpass market
expectation in its first quarter 2014 earnings release, nearly
22.5 million shares were traded on the exchange. It appears that
investors hardly fail to miss out on the opportunity of having a
strong utility company in their portfolio guaranteeing steady
Exelon currently holds a Zacks Rank #2 (Buy). Another
utility sharing the same rank is
American Electric Power
AMER ELEC PWR (AEP): Free Stock Analysis
DUKE ENERGY CP (DUK): Free Stock Analysis
EXELON CORP (EXC): Free Stock Analysis Report
PEPCO HLDGS (POM): Free Stock Analysis Report
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