Exelon Corp., the largest U.S. nuclear operator, agreed to buy Pepco Holdings Inc. for $6.8 billion in cash in this year’s biggest utility acquisition in North America.
The deal values Pepco, operator of the utility that serves the Washington metro area, at $27.25 a share, according to a joint statement today. That represents a 20 percent premium over Pepco’s closing price yesterday.
U.S. power utilities have announced $14.9 billion of acquisitions in the past year, according to data compiled by Bloomberg, as they seek to reduce costs through greater scale. Buying Pepco will bring Chicago-based Exelon 2 million customers and help it expand in the eastern U.S., where it already owns utilities serving Philadelphia and Baltimore.
“Exelon and Pepco Holdings have a compelling strategic rationale for merging, given our geographic proximity and similar utility business models,” Exelon Chief Executive Officer Chris Crane said in today’s statement.
U.S. electricity sales have declined in four of the past five years, according to a December report from the U.S. Energy Information Administration. Natural gas prices, which help set the price of power in most markets, have fallen about 64 percent since a July 2008 high amid a flood of new output from U.S. shale formations, data compiled by Bloomberg show.
Crane said in November the company was considering an acquisition of a regulated utility because it wanted to shift to assets that provide steady and predictable returns. Last year, Exelon cut its quarterly dividend for the first time amid falling electricity rates for its nuclear plants that sell in the open market.
“This will mitigate Exelon’s exposure to wholesale merchant power markets,” Paul Patterson, a New-York based utility analyst for Glenrock Associates LLC, said today in a phone interview. “Regulated properties such as Pepco are attractive and there are not that many that are available.”
Pepco had been viewed as a likely target because its regulated utilities have earned less than their allowed return on investment, Kit Konolige, an analyst with BGC Financial LP, wrote in an April 29 research note. In addition to Washington, the company operates utilities in Delaware, Maryland and New Jersey, according to its website.
Crane will remain president and CEO of the combined company. Joseph Rigby, his counterpart at Pepco who had previously announced his planned retirement, will remain in his current roles until the deal closes. That’s expected to take place in the second or third quarter of 2015.
Shares of Washington-based Pepco rose 5.7 percent on April 28 after industry website Sparkspread.com reported the company had hired investment banks for a strategic review. Pepco stock had fallen 1.4 percent in the previous 12 months before the report, compared with a 5.2 percent rise in the S&P 500 Utilities Index.
Exelon, which also owns the electric utility that serves Chicago, acquired Constellation Energy for $7.36 billion in 2012. Exelon fell 0.9 percent yesterday to $36.18, paring this year’s advance to 32 percent.
Pepco advanced 17 percent to $26.67 before the start of regular trading in New York.
Barclays Plc, Goldman Sachs Group Inc. and Loop Capital Markets are acting as financial advisers toExelon. Lazard Ltd. was the lead financial adviser to Pepco.