(Reuters) - 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 customers.
Exelon’s utilities deliver electricity and natural gas to more than 6.6 million customers in Maryland, Illinois and Pennsylvania.
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 counsel.
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