Washington-based Potomac Electric Power Co. announced yesterday that it has agreed to acquire Conectiv Inc., a Delaware power and telecommunications company, for $2.2 billion in cash and stock.
The merger, which is expected to be completed in 12 months, will create the largest electricity-delivery company in the mid-Atlantic region. The combined companies, which will become subsidiaries of a holding company that has yet to be named, will serve 1.8 million customers in Maryland, Delaware, the District of Columbia, New Jersey and Virginia.
Pepco will pay Conectiv stockholders $25 a share in cash or stock. Pepco stockholders will receive one share of the holding company for each share of Pepco stock they hold.
Pepco will reduce its annual dividend to $1 a share from $1.66, effective in June, company officials said, to make Pepco's dividend payout ratio comparable to that of other delivery companies and provide funds for growth. The deal will immediately add to Pepco's earnings per share, the company said.
"Pepco was a Wall Street darling in the 1980s," said Maurice E. May, an equity analyst who covers a number of power companies for Friedman, Billings, Ramsey & Co. "In the 1990s, they fell out of favor because their earnings and dividends were flat. I think there are people who hope it will reclaim its favor through this merger. It certainly increases the size of Pepco, and it will offer some growth opportunities."
Shares of Pepco rose 50 cents to $21.85 on the New York Stock Exchange yesterday. Conectiv shares rose $1.27 to $22.27.
"We're very excited by this," John M. Derrick Jr., chairman and chief executive of Pepco, said yesterday morning in a teleconference call with analysts. "This fits Pepco's strategic plan. It provides opportunities for earnings growth and will earn faster for our shareholders. It's the right deal at the right time with the right partners."
Derrick added that the deal will result in earnings growth of 6 percent to 8 percent. Pepco reported revenue of $2.62 billion last year. Conectiv's revenue last year was $5 billion.
The new holding company, which will keep its headquarters in Washington, will be led by Derrick, who will be chairman and chief executive officer.
Conectiv Chairman and CEO Howard E. Cosgrove plans to retire at the completion of the merger, which is contingent on the approvals of stockholders of both companies and of state and regulatory agencies.
