Edison Makes Offer to Buy SDG&E; in $2-Billion Deal
A battle to feed Southern California’s appetite for electricity erupted Tuesday when SCEcorp, the parent of Southern California Edison, moved to swallow San Diego Gas & Electric and scuttle a proposed merger of the San Diego utility with one from Tucson.
The stock swap, valued at $2 billion, would create the nation’s biggest electric utility at 4.8 million customers, extend Edison’s territory to the Mexican border and cede it the rights to perhaps the fastest-growing electricity market in the United States.
In the process, SCE declared, a merger of the two firms would create efficiencies that would benefit the customers of both by lowering San Diego’s unusually high rates for electricity while enabling Edison to spread its costs over more customers.
But the friendly offer raised antitrust questions, and the deal would get close scrutiny from the California Public Utilities Commission as well as several federal agencies. PUC Chairman Stanley Hulett said the merger would have to benefit customers of both utilities to win approval.
Edison itself raised antitrust questions about the recently proposed merger between SDG&E; and Tucson Electric Power, a combination that would serve barely one-fourth as many customers as the enterprise proposed by SCE.
Analysts have been predicting a consolidation wave for two years, seeing massive savings from a geographical consolidation that would occur as the nation’s 136 investor-owned utilities are merged into about 40 companies.
The SCE offer, which would swap 1.15 shares of SCE for every share of SDG&E;, is conditioned on scuttling the plan announced in June to merge Tucson Electric into the San Diego utility.
As part of that agreement, if either SDG&E; or Tucson Electric backs out, it must pay the other $25 million.
Edison said the offer--equal to $36.08 per SDG&E; share based on Edison’s closing price of $31.37 Tuesday on the New York Stock Exchange--represents a premium of about 15% over the two companies’ nearly identical trading prices over the past nine months.
Negotiations in Offing
Tom Page, SDG&E; chairman and chief executive, said that the premium was “a little skinny” and that it looked more like 10% to him. SDG&E; stock rose $1.25 Tuesday and closed at $34.125 on the New York Stock Exchange.
But the offer and Page’s comments appeared to set the stage for negotiations. He said a letter from SCE Chairman and Chief Executive Howard Allen seemed to suggest, “Here’s an offer and we’re willing to negotiate.”
Among the differences between the two proposals is that the Tucson deal would leave SDG&E; as the controlling entity, and Page would be chairman and chief executive in the new firm. SDG&E; would appoint seven of the 12 board members, and virtually no jobs would be lost.
Analysts said the SCE offer is apparently a better deal for shareholders--Edison said their dividend would jump 10% and earnings per share would climb 17%--but it would fold SDG&E; into the bigger Rosemead-based company and promises no specific jobs for top managers. Three SDG&E; executives would join the 17-member board.
SCE said it hoped to reduce costs by $100 million through efficiencies, including the elimination of jobs in the new combined entity. But the company said it believes most or all such cuts could be accomplished through attrition and early-retirement programs.
Lower Rates Seen
“At first blush, with the two companies operating next door to each other as one big, big company, it looks as if they’d be able to shave more costs and lower rates a little bit more than under the Tucson proposal,” said John Curti, analyst at Birr, Wilson & Co. in San Francisco.
However, local control and political independence from Los Angeles could prove important, said Charles Imbrecht, chairman of the California Energy Commission. A recent offer by Pacific Gas & Electric in San Francisco to acquire the financially troubled Sacramento Municipal Utility District fell through earlier this year after fierce local opposition.
“The issue of autonomy and independence in San Diego is not dissimilar from the perspective that killed the SMUD thing,” Imbrecht said. “I suspect this will have an impact.”
SDG&E; has among the highest electricity rates in the country and charges about 25% more than Edison. SCE’s Allen promised “meaningful rate reductions shortly after consummation of the merger for SDG&E; customers,” with a goal of parity “over time.”
This would be accomplished through integration of the two companies’ adjacent operations. However, some analysts said that SCE’s absorption of the higher-cost San Diego utility would place pressure on the company’s rates to its own customers in the short term.
Edison has 3.8 million electric customers and SDG&E; has 1 million. The combined firm would easily surpass Pacific Gas & Electric’s 4 million electric customers to make it the biggest electric utility in the nation.
Demand Growing in Region
For Edison, the prize would be the San Diego region, where demand for electricity is forecast to climb at a rousing 3.02% a year versus 2.36% for SCE’s current territory and 1.79% for Pacific Gas & Electric between now and 1999, according to the California Energy Commission.
Edison and SDG&E; are already skirmishing over residential customers in new subdivisions along the border between the two utilities’ service territories. A merger with Tucson would give SDG&E; lower-cost electricity that would present tougher competition for Edison.
SCE’s move on the San Diego company was predicted two years ago by Edward J. Tirello Jr., electric industry analyst for Shearson Lehman Hutton in New York.
SCE’s Allen confirmed the impression that Edison’s bid was triggered by news of the Tucson bid. “We felt we had to move,” Allen said in an interview.
Said Tirello: “SCE wanted that utility for its own. The growth in California is in SDG&E;’s territory. That’s why they wanted it.”
Columnist James Flanigan’s analysis of the proposed utility merger appears in Business.
THE BIGGEST UTILITIES The nation’s largest electric utilities (1986 total customers):
1. Pacific Gas & Electric 3,854,774
2. Southern California Edison 3,589,395
3. Commonwealth Edison (Chicago) 3,060,038
4. Consolidated Edison (New York) 2,846,094
5. Florida Power & Light (Miami) 2,791,461
24. San Diego Gas & Electric 940,736
Source: Edison Electric Institute
