* Offers to buy Pepco for $6.83 bln, or $27.25/share in cash
* Deal will help Exelon sell more power at regulated rates
* Exelon shares fall 5 pct, Pepco up 18 pct
(Updates share price, adds Breakingviews link)
By Swetha Gopinath and Kanika Sikka
April 30 Exelon Corp said it would buy
Pepco Holdings Inc for $6.83 billion, helping it
overtake Duke Energy Corp as the biggest power
distribution company in the United States.
The deal will allow Exelon to sell more power at stable
rates set by regulators at a time when an abundance of cheap
natural gas is dragging down power prices in the open market.
Exelon's move to reduce its exposure to the vagaries of the
wholesale power market comes as U.S. utilities struggle with
falling electricity demand in both the open and regulated
markets due to increased energy efficiency and a weak economy.
However, Exelon's stock fell as much as 5 percent to $34.22.
"Some investors might question Exelon's desire to increase
the company's regulated exposure at a time when power markets
appear to be recovering," said Wells Fargo analyst Neil Kalton.
The company defended the acquisition saying it was
maintaining substantial exposure to the recovery in prices.
"The acquisition also supports our belief in the value of an
integrated utility, with a balanced mix of regulated and
non-regulated cash flows," Exelon Chief Executive Chris Crane,
who will lead the combined company, said on a conference call.
Exelon said its earnings from the regulated business is
expected to rise to as much as 65 percent after the deal, from
about 60 percent now.
Pepco's shares rose as much as 18 percent before closing
17.4 percent higher at $26.76, slightly below Exelon's offer
price of $27.25 per share, despite fears of severe regulatory
scrutiny for the deal.
However, two experts said the deal was unlikely to run into
serious trouble from regulators, who most likely will include
the U.S. Justice Department, the Federal Energy Regulatory
Commission and public utility commissions in New Jersey,
Delaware, Maryland, and the District of Columbia.
There is no antitrust issue since the two companies don't
have customers in the same areas, said Bruce McDonald, an
antitrust expert with Jones Day law firm.
Pepco operates utilities in the District of Columbia,
Delaware, Maryland and New Jersey, serving about 2 million
Exelon's utilities deliver electricity and natural gas to
more than 6.6 million customers in Maryland, Illinois and
The acquisition would not deter Exelon from buying more
renewable and conventional power assets, Crane said. At the same
time, the company is looking to raise up to $1 billion by
selling non-core assets, he said.
Weak power prices and consumption have spurred consolidation
among utilities in the past three years, with Exelon itself
having bought Constellation Energy for $7.9 billion in 2011.
Duke Energy and AES Corp have also made acquisitions.
Exelon said it expected Pepco to "significantly" add to
adjusted earnings in the first full year after the deal closed.
The company also reported a lower-than-expected profit for
the first quarter, hurt by weak energy prices and a fall in
nuclear and coal output.
Barclays, Goldman Sachs & Co and Loop Capital Markets are
Exelon's financial advisers. Kirkland & Ellis LLP is its legal
Lazard is Pepco Holdings' financial adviser. Sullivan &
Cromwell LLP and Covington & Burling LLP are its legal counsel.
(Additional reporting by Diane Bartz in Washington; Editing by
Saumyadeb Chakrabarty and Savio D'Souza)