WASHINGTON, April 30, 2014 — In a surprise announcement, at least to some, giant utility Exelon (EXC) announced today that it will acquire D.C. and Delmarva area utility Pepco (POM) for $27.25 per share in an all-cash deal offering roughly a 20 percent premium over Pepco’s closing price Tuesday.
As is typical in the wake of such announcements, POM rocketed up nearly 20 percent as markets opened this morning, while EXC shares were down about 3.5 percent. At 10:45 EDT, they had recovered to around $35 per share, while POM shares were settling in at around 26.75 per share.
The transaction, which is estimated to close sometime in mid- or late-2015, will create another regional mega-giant utility company, joining already substantial utilities like Dominion Power (D), Duke (DUK) and First Energy (FE) that already dominate much of the Mid-Atlantic and Eastern seaboard.
The new combination, which will need to run the gauntlet of state and Federal regulators before it closes, will serve approximately 10 million customers and residents, assuming no divestitures are required. Both companies’ boards have already unanimously approved the transaction.
The transaction was perhaps not surprising at least on one level. Exelon already has a large area footprint due to its earlier acquisitions of Baltimore Gas & Electric and Constellation, the latter of which was finally merged into Exelon last year. The Chicago-based EXC also owns and operates Philadelphia-based PECO and the major Illinois and Midwestern utility Commonwealth Edison. Given its home base, Federal regulatory quarrels via the Federal Energy Regulatory Commission (FERC) should be minimized, at least under the current political administration.
Aside from local area concerns, including levels of employment in the combined companies, D.C. area residents are likely to approve the move, albeit reluctantly. On one hand, as utilities continue to combine into giant conglomerates, fears will arise concerning lack of competition in consumer pricing of electricity and gas.
On the other hand, regional consumers, particularly in Maryland and the District, have complained for years about Pepco’s woeful response times during power emergencies. The deep pockets and substantial workforce of the combined companies could do much to alleviate these concerns, although Maryland and District regulators are likely to demand substantial and verifiable service improvements as one price for their approval.
Long time holders of Pepco’s stock may be the most disappointed in this transaction. While the stock has been relatively moribund for years, many income-oriented holders have depended on the company’s historically outsized dividends for a portion of their retirement cash flow. Exelon’s dividend, on a percentage basis, is notably lower, and it’s yet to be determined how this may be adjusted after the transaction closes.
On balance, however, the transaction should be a plus for the region, particularly in terms of service reliability.
One question remains, though, in the Maven’s mind. As we’ve already noted, POM has not been a notable performer for years on the capital gains front. Yet earlier this month, the stock began a surprisingly relentless march upward, boasting a nearly 10 percent gain in April prior to this morning’s announcement.
This, of course, raises the usual rhetorical question: who knew about this transaction ahead of time; and did insiders and/or those privy to insider information learn about the transaction and position their portfolios ahead of the news?
Given the location of the surviving company in the transaction as well as the transaction’s timing, it might be a good idea for the SEC to take a look at trading in POM in the month of April. But we won’t hold our breath, given America’s fundamental transformation.