SDG&E; May Buy 12 Companies in Diversification

Hoping to bolster non-utility profits, San Diego Gas & Electric is planning to acquire as many as 12 diversified, non-regulated businesses that, within 10 years, could generate as much as 25% of the utility’s earnings, a company official said Monday.

SDG&E;, which in April abandoned its plan to create a holding company, had previously announced that it would house its non-utility businesses in Pacific Diversified Capital Corp., an existing subsidiary that has $65 million in equity capital to finance acquisitions.

The acquisition schedule includes the purchase of as many as four companies by the end of 1987, according to Pacific Diversified President Richard Korpan, who doubles as SDG&E;’s chief financial officer.

“We’re going to stop talking about (diversification) and start doing it,” said Korpan, who has helped steer the utility’s two-year effort to diversify.

SDG&E;’s non-utility acquisitions could generate as much as 10% of SDG&E;’s total earnings within five years, Korpan said. SDG&E; reported $202.7 million in net income and $1.7 billion in revenue during 1985.

Pacific Diversified--which has five employees including Korpan--will move into new offices in the Great American First Savings Bank building, 600 B St., by mid-month.

Last week, SDG&E; Treasurer R. Lee Haney met with utility industry analysts in New York to describe SDG&E;’s utility and non-utility business plans. One analyst, interviewed last week, applauded SDG&E;’s plan to diversify through Pacific Diversified and called diversification a “necessity in today’s utility environment.”

The utility decided to house its non-utility businesses in Pacific Diversified after aborting a planned holding company that SDG&E; officials said would have speeded diversification. Although state regulators approved the planned holding company, SDG&E;’s board of directors decided that the state Public Utility Commission approval included several unacceptable restrictions.

SDG&E; has the option of returning to the utility commission--which by early next year will include three members appointed by Gov. George Deukmejian--at a later date with a revamped proposal.

Pacific Diversified will concentrate on acquiring companies with revenues between $10 million and $100 million, shying away from start-up companies or businesses that are faltering and in need of a turnaround, Korpan said.

Pacific Lighting, a Los Angeles utility that has been diversified for 10 years, last week announced a plan to acquire the Thrifty drugstore chain for more than $800 million, but Pacific Diversified has decided to “start small to minimize our mistakes and learn,” Korpan said.

At the top of Korpan’s “shopping list” are companies that provide services to the electric utility industry. He said he also wants to acquire a company that would operate SDG&E;’s planned real estate holdings.

Korpan said Pacific Diversified managers probably will review about 100 acquisition candidates a month. He said that initial contacts have showed that “there are a lot of firms that would like to be associated with this utility.”

According to Pacific Diversified’s guidelines, acquisition candidates should boast pretax earnings of at least $1 million and enjoy at least a 5% growth rate in annual earnings.

Pacific Diversified hopes to acquire companies with “reasonable” balance sheets that “show a positive working capital . . . in excess of interest-bearing debt and leases,” Korpan said.

Because SDG&E; intends to run Pacific Diversified with a lean headquarters staff, Korpan will be trying to retain managers of the companies that are acquired, running them as “autonomous” organizations, according to the guidelines.

To do that, Pacific Diversified will seek companies with management teams who hold a “significant amount of equity in their company.” In addition, a “high percentage” of those managers’ incomes will geared to “reward the people who make growth happen,” Korpan said.