Charlotte, N.C., utility Duke Energy(DUK) - Get Report said Monday it agreed to acquire Piedmont Natural Gas (PNY) for $4.9 billion in cash, a price observers think is expensive in an industry searching for growth.
Piedmont shareholders will receive $60 in cash for each of their shares, a 42% premium over Piedmont's closing price Friday of $42.22. Duke will also assume about $1.8 billion in Piedmont's net debt, giving the deal an enterprise value of $6.7 billion.
Piedmont's stock jumped 37% on the news to $57.83. Duke's slid 2.7% to $71.96.
Duke said the deal establishes an attractive natural gas growth platform that expands its capabilities for customers and will add to its adjusted earnings per share in the first full year after it closes, enhancing its long-term 4% to 6% earnings per share growth rate target.
Duke Energy CEO Lynn Good said in a statement that the deal brings 1 million customers in the Carolinas and Tennessee to the company.
"This combination provides us with a growing natural gas platform, benefiting our customers, communities and investors," she said.
Piedmont Chairman, CEO and President Tom Skains said in a statement that the combination will deliver compelling value to its shareholders, expand its platform for future growth, enhance its ability to provide excellence in customer service and give its employees more opportunities in one of the largest energy companies in the U.S.
The deal has to clear the North Carolina Utilities Commission, Hart-Scott-Rodino and a majority of Piedmont's outstanding shares, but is expected to close by the end of next year.
Duke said it plans to pay for it with debt, $500 million to $750 million in newly issued equity and other cash sources. It already has a fully underwritten bridge facility from Barclays.
Some analysts thought the deal was pricey, coming in at a multiple much higher than where Duke is trading. On a conference call with analysts and investors, Maura Shaughnessy, a manager of MFS Investment Management's Utilities Fund, estimates the deal came at 30 times future earnings and 4 times book value. "It's quite a head-scratcher for me," she said.
Paul Patterson, an analyst at Glenrock Associates, told The Deal that the premium is "considerable but I think the deal illustrates the attractiveness of utility regulated returns versus the cost of capital that is available to finance such an acquisition."
Good didn't address the high premium head-on, but said the company is looking to expand its natural gas assets as it reduces its exposure to coal. "It's in our backyard and provides a platform for further expansion," she said. "We look forward to returning great returns to our shareholders in dividends and in growth."
Good said synergies were not part of the company's upfront analysis on the transaction but said the company has been successful at integrating businesses, "and that's our objective."
Duke management also didn't rule out taking on debt at the corporate level but said it wants to maintain its balance sheet strength. It also doesn't plan to sell assets to help fund the deal and isn't looking at any other natural gas acquisitions at the moment.
When asked about its international assets, which have been suffering recently and made its 4% to 6% growth target difficult, Good said management would be analyzing the entire company "to position it for growth."
Piedmont began operations in 1951 in Charlotte, where Duke was founded in 1904. Duke said both companies played leading roles in supporting economic development in the Carolinas and establishing the Charlotte region as a major hub for energy companies. In 2002 some of Piedmont's assets were picked up from Progress Energy -- now part of Duke -- for $425 million.
Duke and Piedmont are already partners in the $5 billion Atlantic Coast Pipeline, which will be the first major natural gas pipeline to serve eastern North Carolina. Duke will own 40% of the pipeline and Piedmont will hold 10%, while Dominion Resources(D) - Get Report will have 45% and AGL Resources (GAS) will have 5%. AGL is in the midst of being purchased by Southern Co.(SO) - Get Report for $8 billion.
Piedmont will keep its name, operate as a business unit of Duke and maintain its presence and in southeast Charlotte, Duke said. Duke and Piedmont plan to keep their current levels of community involvement and charitable giving.
Duke expects to add one member of Piedmont's board to its board after the transaction closes and an existing member of Piedmont's management will lead Duke's natural gas operations in the Carolinas, Tennessee, Ohio and Kentucky, reporting to Good. Duke didn't say who that person would be.
Duke Energy is the largest electric power holding company in the U.S., with 7.3 million electric customers in six states in the Southeast and Midwest and commercial power and international energy business segments owning and operating power generation assets in North America and Latin America.
Duke has been expanding its portfolio of renewable energy assets in the U.S. recently. This past summer it picked up two solar power projects in California from Kruger Energy, a 20-megawatt solar power project in Shawboro, N.C., from Ecoplexus, and solar provider Stellar Energy from solar distributor Soligent Holdings, all for undisclosed sums. And this past month it bought a 50% stake in Mesquite Creek Wind, a 211-megawatt wind power project near Lamesa, Texas, through a joint venture partnership with Sumitomo Corp. of Americas. Duke and Sumitomo also share ownership of the 131-megawatt Cimarron II and 168-megawatt Ironwood wind power projects in Kansas.
Last week Duke said it bought a majority stake in Five Peaks Capital Management-backed Phoenix Energy Technologies, a provider of energy management systems and services for commercial customers, for an undisclosed sum.