NEW YORK (The Deal) -- Public Service Enterprise Group (PEG - Get Report) , the Newark, N.J.-based electric utility, has been out in the market trying to find an M&A partner, but it has been unable to ink a deal so far, said several sources familiar with the company.
The Exelon-Pepco deal, announced April 30, was a transaction valued at $6.8 billion on an equity basis. The price for Pepco was a 24.7% premium to Pepco's closing price of $21.85 on April 25 and a 29.5% premium to the volume-weighted average share price over the prior 20 trading days.
PSEG has been said to be in recent talks with Allentown, Penn.-based PPL (PPL - Get Report) , but sources said a deal did not come about for a variety of issues. One thing that sometimes holds up deals is an issue of leadership. In the case of Pepco, although CEO Joseph Rigby was only 57, he was looking to retire.
PPL CEO William Spence is also 57-years-old.
PPL's fellow utilities have swirled around it in the past, and to avoid being a takeout target, PPL acquired E.ON US back in 2010 for $7.76 billion. PPL subsequently changed the name of the company to LG&E and KU Energy LLC.
A tie-up between PSEG and PPL would have created a company valued at around $41 billion, given their respective market capitalizations of $19 billion and $22 billion.
"The CEO is frustrated that he has not been able to get a deal done," one source said. Unfortunately, "their peer group is getting smaller and smaller so the question becomes: who is left for them to merge with?"
A PSEG spokesman declined to comment, as a matter of policy. PPL also declined comment.
Other logical M&A partners for PSEG include New York-based Consolidated Edison, United Kingdom-based National Grid, Akron, Ohio-based FirstEnergy, Richmond, Va.-based Dominion Resources, Columbus Ohio-based American Electric Power, Atlanta-based Southern Co., and Charlotte, N.C.-based Duke Energy.
On Sept. 22, Jefferies & Co. issued a research report on PSEG, downgrading it from a "buy" to "hold" based on concerns with the merchant business. The expectation is that the Western portion of PJM (Pennsylvania, New Jersey and Maryland power pool) - where PSEG doesn't have a substantial presence - will see greater price improvement versus the East, which is where the majority of PSEG's generation is situated, the report stated.
The report also said the company's price advantage it has because of low-cost gas from the Marcellus will likely be eliminated in the future when new gas pipelines enter into commercial operation. PSEG's hedging strategy is less likely to provide for incremental earnings in the event of volatility, the reported noted.
PSEG, with operations primarily in the northeastern U.S., owns the Public Service Electric & Gas Company, a regulated utility providing electric transmission and distribution, and gas distribution service to 5.5 million customers in New Jersey. But it also has an unregulated subsidiary, PSEG Power, which has 13,538 megawatts of merchant generation. Merchant power plants are unregulated and sell power into the competitive market, and a return is not guaranteed.
In lieu of an M&A deal, PSEG's spinning off its merchant business could make a lot of sense.
Even though PSEG isn't under pressure from shareholders to take action, it appears as though it doesn't make sense for its regulated and unregulated to be together long term, said a source who follows the company. "If an M&A deal isn't possible, the logical move for PSEG is to spin off its merchant generation business to unlock value," he said.
PPL, for example, has been among a number of utilities trying to reduce their exposure as of late to the competitive power markets by spinning off their unregulated businesses.
In June, the company and Riverstone Holdings LLC of New York announced an agreement to combine their unregulated power generation businesses into a new, standalone, publicly traded company called Talen Energy Corp.
There has been a flurry of deals in the utilities industry as of late. In addition to Exelon/Pepco, Milwaukee-based Wisconsin Energy announced in June its acquisition of Integrys Energy Group Inc., based in Chicago, for $9.1 billion. Also, NiSource, long seen as a target, announced on September 30 that it was separating the $12.9 billion company into two stand-alone infrastructure concerns.