Wisconsin Energy Corp (WEC.N) said it would buy Integrys Energy Group Inc TEG.N for $5.71 billion to create a larger, more diverse Midwest electric and natural gas delivery company.
The deal is the latest in a series of transactions aimed at minimizing exposure to the volatile wholesale power market, and analysts expect consolidation to continue.
"More than 99 percent of the combined company's earnings will come from regulated businesses," said Wisconsin Energy Chief Executive Gale Klappa, who will lead the combined company.
Prices on both the open and regulated markets have fallen, due to an abundance of cheap shale gas, increased energy efficiency and tepid economic growth.
Integrys also said it was in the late stages of a process to divest its non-regulated marketing unit, Integrys Energy Services, but would keep its solar generation business.
Exelon Corp (EXC.N) said in April it would buy Pepco Holdings Inc POM.N for $6.83 billion to cut exposure to the wholesale power market.
"I wouldn't be surprised to see a continuation of deal activity in the sector," said BGC Financial analyst Kit Konolige.
"A lot of companies have concluded that owning unregulated businesses along with regulated utilities is not as attractive for investors as a pure play."
Integrys shareholders will get 1.128 Wisconsin Energy shares and $18.58 in cash per share, or $71.47 per share based on Wisconsin Energy's Friday close. The offer represents a premium of 17.3 percent to Integrys' Friday close.
Integrys shares gave up some of their gains and were at $68.62 in afternoon trading after touching a life-high of $70.61. Wisconsin Energy's shares were down 2.5 percent at $45.76.
Including debt, the deal is valued at $9.1 billion.
The combined company, to be named WEC Energy Group Inc, will serve more than 4.3 million gas and electricity customers in Wisconsin, Illinois, Michigan and Minnesota.
WEC Energy, which will be the eighth largest natural gas distribution company in the United States, will also hold a 60 percent stake in American Transmission Co [AMTRN.UL], a transmission-only utility.
WEC Energy could take American Transmission public, said Gabelli & Co analyst Timothy Winter.
Wisconsin Energy's nine-member board will add three members from Integrys's board, Klappa said on a conference call.
Wisconsin Energy said the deal would add to its earnings per share in the first full calendar year after closing, expected in the summer of 2015.
"We expect that the combined company will be able to grow earnings at 5-7 percent per year, faster than either one of us is projecting on a standalone business," Klappa said.
The transaction is subject to approvals from the Federal Energy Regulatory Commission, the Federal Communications Commission and some state commissions.
Barclays is Wisconsin Energy's financial adviser, while Lazard is advising Integrys.
(Reporting by Swetha Gopinath in Bangalore; Editing by Sriraj Kalluvila, Saumyadeb Chakrabarty and Ted Kerr)