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Friday, August 04, 2006

Annals of M&A: The mother of all cratered deals 


[WARNING: If you are not a lawyer, investment banker, mergers and acquisitions professional, business journalist, conspiracy theorist, or consumer of electric power in New Jersey, you probably want to scroll right along to the next post. And even so you might. - ed.]


In December 2004 Exelon (NYSE:EXC) signed a merger agreement to buy New Jersey's main electric utility, Public Service Enterprise Group (NYSE:PEG). That deal, valued at something like $18 billion, was contingent on a number of approvals, including that of the New Jersey Board of Public Utilities. The BPU, as it is fondly known, was looking for all sorts of "assurances" and, well, financial benefits for the citizens of the Garden State, a summary of which was detailed in the appendix to a letter the two companies sent to the BPU on Wednesday. Check it out. There are lots of goodies in the $1.5 billion package that do not obviously benefit the man-on-the-street New Jerseyan, but players to be named later or some interest group. For example, who is going to get the "economic development" money? Why is it in the interests of New Jersey for Exelon to guarantee that it won't lay off any union members until 2011?

Anyway, none of this much matters. Exelon and PSEG, no doubt exhausted from the endless dicking around, served an ultimatum to the BPU in their Wednesday letter:

If the Staff cannot agree in principle to these overall terms or the resultant timetable, we will so inform the Exelon and PSEG Boards. In such case we believe it is likely that we will be directed to withdraw the merger application and terminate our Merger Agreement. In such case the benefits provided by the merger to PSE&G’s customers and to the State will be lost, and PSE&G will need to pursue its pending requests for approximately $200 million per year of electric and gas base rate relief. This is not a threat. It is just a factual statement of where both Companies are in terms of financial capability 20 months after entering into their Merger Agreement.

I don't know about you, but I always say "this is not a threat" when I'm making a threat. If I don't want to make a threat, I just don't make one.

Naturally, the BPU, a creature -- and I use that term advisedly -- of State government, did not react well. Not only did it reject the Exelon/PSEG ultimatum, but it wadded it up and jammed it down their throat:
BPU Commissioner Joseph Fiordaliso said he was "dismayed" that Exelon and PSEG issued an ultimatum to the regulatory staff.

"I'm publicly stating that this process is unacceptable," he said.

Oops.

According to the letter filed with the SEC, Exelon is to have a board meeting this afternoon. Of course, we don't know if the "ultimatum" was a bluff or if last minute groveling will change the equation, but you have to figure the deal is in serious trouble. If so, imagine how frustrating it will be for all those people who worked so hard for twenty months. Wonder how the PSEG executive team will pick up the pieces -- they have been running the company for almost two years in the belief that it will be sold. I'm sure that all sorts of valuable employees have left assuming that they would be laid off, their jobs going undone or barely done because the company was in stopgap mode. Now those positions will have to be filled, and the executives will have to run the company for the future. That will be a long future, too, because who will buy PSEG knowing the BPU is going to demand more than $1.5 billion?

UPDATE: Called! Exelon is wiggling out of its bluff with what little dignity remains:
``It was more of a request to get a response because the board was meeting today,'' Kellie Szabo, an Exelon spokeswoman, said in an interview. She declined to say whether the board would make a decision today on whether to abandon the talks.

This deal isn't dead yet. It may yet end up as a smoking crater, but the dream is definitely alive.

STILL MORE: Exelon's board blinked! "Talks" with the BPU will continue until August 21. Good move. True, Exelon CEO John Rowe is now the BPU's bitch, but if he preserves its dignity and tosses in some additional tip I bet they get the deal through without a huge revision in the benefits package. That will come as a huge relief to PSEG's management, among others.

3 Comments:

By Anonymous Caterpillar, at Fri Aug 04, 06:01:00 PM:

Makes the minor annoyances of a delayed closing like waiting for carve-out financials seem like a walk in park. I have enjoyed reading your blog TigerHawk.  

By Blogger joated, at Sat Aug 05, 11:17:00 AM:

It's still absurd that BPU has been playing with this for 20 months.

But, as you noted, the BPU is a creature of government and in NJ that translates into expensive, multilayered, and very, very inefficient.  

By Anonymous Anonymous, at Sat Aug 05, 02:08:00 PM:

Not a lawyer or anything of the others but I'd like to know were the 1.5 billion goes to. I'd bet that Board in stacked with Dem Party leeches. In NJ we are not privy to this type of info since the Dems know better than a citizen on how to take care of our taxes. We should't be bother with this. We are just cattle grazing in the pasture. If I didn't have to work here....Err I mean I know it's all Bush's fault  

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