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Exelon Corp. to Acquire Pepco, Expand in Mid-Atlantic - Analyst Blog

By: Zacks.com
Posted: 5/1/2014 6:50:00 PM
Referenced Stocks: AEP;DUK;EXC;POM

Acquisitions appear to be the safest bet for the nuclear fueled energy supplier Exelon Corporation ( EXC ) to further expand its footprint in the U.S. Exelon has decided to acquire Pepco Holdings Inc. ( POM ), 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 Pepco shareholders.

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 . ( DUK ) acquired Progress Energy for nearly $26 billion, to form the largest electric utility in the U.S. surpassing Exelon.

Synergies

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 customers.

Funding

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 conditions.

Hurdles

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 merger.

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 shareholders.

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 returns.

Exelon currently holds a Zacks Rank #2 (Buy).  Another utility sharing the same rank is American Electric Power ( AEP ).



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