Gas-Electric Mergers: Money Well Spent?
The top traders, investors and managers tell why energy convergence is still a pipe dream.
[Graphic tables included in the print version of the Fortnightly are not included in this electronic version.]
Energy investors seemed less willing in 1999 to greet electric/gas combination mergers with the kind of blind enthusiasm they tended to show in prior years.
Instead, they now demand proof that energy convergence really does create tangible value beyond the mere sum of the parts. At least that's the impression gained from talking with John W. Barr, managing director at SG Barr Devlin, part of the French global banking institution Société Générale.
"The stock price reaction to announced utility mergers changed from an automatic rise in both prices to an automatic decline in both prices," says Barr. He adds that of the 32 deals announced in 1999, the stock value declined in over half the cases.
"The gallows humor would be that [in the beginning] the market couldn't find a deal that it didn't like [and then later on] couldn't find a deal that it did like, in 1999."
Some analysts say the fall in shares reflects only that the pool of traditional investors in the energy sector is just not large enough to support the flurry of mergers taking place, especially since that pool dwindled in 1999 due to the lure of technology stocks.
Nevertheless, Barr maintains that the value of "convergence" remains to be seen, because merging gas and electric companies do seem to outperform others. Furthermore, adds Barr, "If the overall stock market has a correction, I think you will find that investors will like utilities again."
In fact, many utility and energy company stock prices got a boost early this year when investors ran for safety to utility stocks as technology stock prices declined. The PHLX Utilities Index rose 4 percent, while share prices of merging gas and electric companies like Duke Energy, Edison International, PG&E Corp., Reliant Energy and TXU increased. That marked a reversal from 1999, the worst year for electric utility stocks since 1974, according to market analysts.
Barr believes the financial picture will improve for energy companies pursuing a gas and electric strategy, but warns that the sources of unregulated earnings that might result from a "convergence" deal comprise a fairly short list.
In addition, some analysts say last year's no-confidence vote in merged electric and gas companies could reflect the energy industry's own growing skepticism of their value.
A Btu Market? Not Quite Yet
Ninety-nine percent of the mergers between gas and power companies that took place during the last few years have not fully integrated the two commodities. The deals haven't reached their promised potentials.
That's the view of Mike Flinn, executive vice president and chief operating officer at PG&E Energy Trading.
Duke Energy's chairman, president and CEO, Richard Priory, also is skeptical.
"If you look at some of the other combinations where gas might have bought electric or, in some cases, electric might have bought gas, most of those really did not integrate the companies together. They kept an