Kansas City Power & Light Cancels Merger with Western Resources

Updated from 10:33 a.m. EST

Kansas City Power & Light (KLT Quote) said Monday that it was dropping its plans to merge its electric utility assets with those of Western Resources, (WR Quote) after three years of talks resulted in a regulatory tangle and uncertainty surrounding Western's declining share price.

The Kansas City, Mo.-based utility, a small electric company by industry standards with 450,000 customers, said it decided to terminate the agreement due to difficulties at Western's Protection One subsidiary as well as a steep drop in Western's stock price.

Shares of Western, which is based in Topeka, Kan., have plunged to 16 1/4 from 43 1/8 on March 18, 1998, when the merger agreement was signed.

"We have expressed our deep concern with the problems facing Protection One and their impact on Western as a whole," KCP&L's chief executive, A. Drue Jennings, wrote in a letter to David Wittig, Western's chief executive.

"These problems and the related dramatic decline in Western's stock price since we signed the merger agreement in March 1998 obviously have a direct bearing on the value of the contemplated transaction to our shareholders," he wrote.

The merger plans, which were seen as an important element in both regional companies gaining a bigger piece of the consolidating utility business, have also fallen victim to excruciatingly slow state regulatory procedures in Missouri and Kansas.

"Regulators in both those two states were extremely slow in approving this merger," said Barry Abramson, a utilities analyst for PaineWebber. "We've seen lots of utilities complete mergers in 12 months -- this deal went on for three years."

Abramson rates both companies "attractive," which is not a recommendation to buy, and his firm was not involved in the merger.

Western Resources, which provides electric utility services to 625,000 customers, said it was disappointed by KCP&L's decision to end the talks, especially since the companies appeared to be nearing the regulatory finish line.

"It was our intention to continue with the transaction," said Michel Philipp, a Western Resources spokeswoman. "We were about two months away from the final regulatory approval."

KCP&L also noted that its adviser, Merrill Lynch, said the deal would not be "fair" to its shareholders. The company also said that opportunities to grow via Western Resources' 85% holding in security-system company Protection One no longer existed.

The stock market, which had been anticipating the companies' failure to complete the merger, sent KCP&L up 3/16, or 1%, at 22 1/4. Western was off 11/16, or 4%, at 16 1/4. (KCP&L closed up 3/8, or 2%, to 22 7/16, while Western Resources finished down 7/16, or 3%, to 16 1/2.)

Under the terms of the deal, each side had the right to walk away without financial penalty if the proposed merger was not completed on or before Dec. 31, 1999.

KCP&L said it would continue over the next several weeks to review "strategic alternatives," including separating its generation and distribution/transmission assets into subsidiaries.

Abramson of PaineWebber said that in the near-term he thought KCP&L might try to increase its stock price by selling off its holdings in non-utility units such as its 50% stake in Digital Teleport, a fiber-optic communications company, and use the cash to buy back stock.

This would help the company, which is considered too small to remain a stand-alone electric company, garner a better price should it become the target of another takeover bid.

However, Abramson cautioned that potential bidders might be scared off by Missouri's sluggishness when it comes to giving the necessary regulatory approvals.

Abramson said he expected Western Resources to put its efforts in restoring investor confidence by straightening up its Protection One operations, although he wouldn't rule out the possibility that the company might look to sell its electric utility business.