Dive Brief:
- Public Service Enterprise Group has been looking for merger and acquisition partners at least since April, according to a report on finance website The Street.
- The New Jersey-based utility had been linked to merger talks with Pepco Holdings, which it lost to Exelon, and PPL, which fell through, unnamed sources close to the company said.
- PSEG also owns regulated utility Public Service Electric & Gas Company. Analysts say that if PSEG can’t find a merger, it could unload its 13,538 megawatt merchant generation business to reduce exposure in the same way that PPL and Riverstone Holdings LLC recently combined their unregulated merchant power businesses to form the independent and publicly traded Talen Energy Corp.
Dive Insight:
In September, Jefferies & Co. downgraded PSEG from "buy" to "hold" because prices in the eastern PJM market, where the company’s unregulated subsidiary PSEG Power sells the bulk of its merchant generation, are expected to remain flat. New natural gas pipelines will soon take away the PSEG gas unit’s price advantage by making low-cost Marcellus shale gas more widely available.
The Street speculates that Consolidated Edison, National Grid, FirstEnergy, Dominion Resources, American Electric Power, Southern Co., and Duke Energy could be other M&A targets for PSEG.
Sources named in The Street report say if PSEG can't find a merger partner, it may split its own company.
"If an M&A deal isn't possible," one source said, "the logical move for PSEG is to spin off its merchant generation business to unlock value."
With PSEG’s market cap at $19 billion and PPL’s at $22 billion, a merger would have created a company valued at $41 billion.
PSEG’s talks with Pepco may have failed because its 57-year-old CEO Joseph Rigby wanted to retire. PPL CEO William Spence is also 57-years-old.
To avoid being a takeout target, PPL acquired E.ON US in 2010 for $7.76 billion and split its holdings into LG&E and KU Energy.
Notable 2014 utility mergers include the $6.8 billion Exelon acquisition of Pepco and the $9.1 billion Wisconsin Energy acquisition of Integrys Energy Group Inc. Analysts say the $12.9 billion NiSource’s split into two stand-alone infrastructure businesses may portend another.
