Update: National Grid to Buy Niagra Mohawk

Updated from 12:53 p.m. EDT

In its third U.S. acquisition this year, the National Grid Group(NGG Quote) of Britain announced Tuesday that it planned to purchase one of New York's largest electric and gas utilities, Niagara Mohawk Holdings, (NMK Quote) for a combination of cash and stock valued at $3 billion.

Under the terms of the agreement, the British electric company will acquire all outstanding shares of Syracuse, N.Y.-based Niagara Mohawk for $19 apiece. That represents a 37% premium based on Niagara Mohawk's closing price of $13.88 a share Friday, and about a 15% premium to its 52-week high of $16.19, reached last October.

Niagara Mohawk ended up $1.88, or 13.5%, at $15.75. The American depositary receipts of the National Grid Group finished down $1.13, or 2.7%, at $40.63.

National Grid will offer at least $1 billion in cash to Niagara Mohawk shareholders, and cover the balance by issuing approximately 248 million new ordinary shares, representing about 14% of its share capital. The British power grid giant will also assume $5.9 billion of Niagara debt.

National Grid already owns and operates transmission and distribution systems in Massachusetts, New Hampshire and Rhode Island serving about 1.7 million customers. In March, the company completed its acquisition of New England Electric System for $3.2 billion, renaming it National Grid USA. A month later, it completed its purchase of Eastern Utility Associates, a neighboring utility, for about $642 million.

The latest deal doubles National Grid's U.S. operations, adding Niagara Mohawk's 1.5 million electricity customers and more than 500,000 gas customers in upstate New York. David Jones, chief executive of National Grid, said more than 56% of the British company's profits will come from U.S. operations following completion of the deal, which makes National Grid the largest transmission owner in the Northeast.

In a conference call with analysts and investors, Jones said the deal, which follows more than nine months of talks, will reinforce the company's position as one of the leading utility companies in the Northeast and a "top tier" utility in the U.S. He said he would not rule out further acquisitions in the Northeast to fill in the company's "footprint" in the U.S., but did not mention specific takeover targets.

Jones said he hoped to complete the transaction by the fall of 2001, pending shareholder and regulatory approval. The deal also requires that Niagara Mohawk sell its nuclear facilities, including its Nine Mile Point Nuclear Station units.

National Grid said the deal should cut costs of the combined company by about 10% over the next four years, generating about $90 million in annual savings through the elimination of overlapping functions -- primarily in administrative areas. The company expects about half of the projected savings to be achieved within the first year.

William Davis, chairman and chief executive of Niagara Mohawk, said from a statement the deal should lead to lower energy costs in the New York region. After the transaction, which includes a $150 million break-up fee, the company will be integrated into National Grid USA but will retain its name.

In a research note Tuesday, PaineWebber analyst Barry Abramson said the acquisition of Niagara Mohawk not only doubles National Grid's customer base in the U.S., but represents the company's first significant investment in natural gas distribution in the U.S. His firm maintains an "attractive" rating on Niagara Mohawk, with a long-term target price of $19 a share, in anticipation that the acquisition will be completed in 12 months.

Rothschild is advising National Grid and Niagara Mohawk is being advised by Donaldson Lufkin & Jenrette Securities. Merrill Lynch International and Credit Suisse First Boston are the advisers to National Grid.

National Grid, based in Coventry, England, was created in 1990 when the government sold the electric distribution system in England and Wales.