San Diego G&E; Snubs SCEcorp’s $2-Billion Offer : Prefers Independence; Says Tucson Merger Will Raise Value; Analysts Surprised
San Diego Gas & Electric, citing a strong desire to remain independent, rejected Thursday a $2-billion takeover bid by SCEcorp that would have created the nation’s largest electric utility.
SDG&E; instead repeated its intention to complete a merger with Tucson Electric Power, a coal-rich utility in Arizona, SDG&E; Chairman Thomas Page said. Page predicted that the proposed merger with Tucson Electric would generate shareholder wealth and lower electric rates, exceeding the short-term benefits promised by SCE, parent company of Southern California Edison.
SCE Chairman Howard Allen described SDG&E;'s rejection as “unbelievable” but said SCE will leave open indefinitely its offer to swap 1.225 shares of SCE stock for each share of SDG&E.; SCE is based in Rosemead.
No Plans to Raise Bid
“One wonders what criteria SDG&E; used in making its decision,” Allen said Thursday in a prepared statement. “We simply do not understand how (SDG&E;) could make the decision. . . . In our judgment, it is superior to any offer that SDG&E; is ever likely to receive.” Allen said the offer was $1 billion more than the net worth, or book value, of the San Diego utility.
SCE has no plans to further sweeten the deal, according to spokesman Lewis Phelps. The stock swap offer--worth about $2.16 billion--"is our best and final offer,” Phelps said.
Allen declined to comment on whether SCE would begin a hostile tender offer for SDG&E;'s outstanding shares. SDG&E; stock closed down 50 cents at $34.875 after reaching a high of $36 before the rejection was announced. SCE closed down 12.5 cents at $32.
But electric industry analysts predicted that SCE, which has excess electrical generating capacity, would continue to pursue SDG&E.; The San Diego utility serves one of the nation’s fastest growing electricity markets but purchases half of its electricity from other utilities.
“I don’t think that SCE is ready to forget this thing and walk away,” said John Curti, an analyst with Birr, Wilson & Co. in San Francisco. Curti predicted that SCE would make another offer before SDG&E;'S proposed merger with Tuscon Electric proceeds very far.
Michael Shames, executive director of Utility Consumers Action Network, a San Diego-based group, said he was disappointed that SDG&E; did not explore the merger with Edison further.
“SDG&E; has gone on record and said its Tucson merger is a better deal for shareholders and ratepayers,” Shames said. “But that’s going to be one tough case to prove.”
Analysts also questioned SDG&E;'s decision not to negotiate directly with SCE’s board.
“I am somewhat flabbergasted that (SDG&E;) didn’t even sit down to hear Edison’s deal,” said Shearson Lehman Hutton’s Edward J. Tirello Jr., a New York-based electric industry analyst who two years ago predicted that Edison would absorb SDG&E.;
“Edison’s deal is superior to TEP,” according to Tirello. “As a shareholder, I would get a 17% increase in my dividend. . . . I don’t get that if SDG&E; merges with Tucson. Edison also promised a 10% (electric) rate reduction within six months, and I don’t see that in SDG&E;'s TEP merger.”
Page said he has not really thought about defending against a possible hostile takeover and declined to speculate on what SCE would do. But Page added that he was “flattered” by SCE’s interest. “We must be doing something right.”
SDG&E; shareholders will conduct an “indirect” referendum on the board’s decision later this year at a meeting where they will vote on the proposed Tuscon Electric merger, Page said.
“They will have a vote on the Tucson merger,” Page said. “If they like (TEP), they’ll vote yes. If they don’t, they’ll vote no and ask management to go on its way.”
Page did not dispute SCE’s claim that its offer was $1 billion over SDG&E;'s net worth. “I’m not arguing with their numbers,” Page said.
However, Page said SDG&E; will, in the long term, deliver increased value to its shareholders and reduced rates to its customers.
“We’ve asked shareholders to hold us accountable, and they will hold us accountable” for Thursday’s action, Page said.
Industry analysts were uncertain whether the state Public Utilities Commission would allow SCE to conduct a hostile takeover of SDG&E;, which has nearly 1 million gas and electric customers in San Diego County and 72,000 electric customers in southern Orange County.
The PUC would “care very much about who controls SDG&E;,” according to spokeswoman Carol Kretzer. “Our staff is going to be watching the situation very carefully.”
However, since no U.S.-based utility in recent history has attempted a hostile takeover of another regulated utility, regulators are uncertain of their role should SCE’s offer turn hostile. If SCE were to mount a public offer to shareholders, the PUC would at some point require that the utility state its intentions. “That doesn’t necessarily mean we’d wait until they have 51%" of SDG&E;'s stock, Kretzer said.
Analysts also said SCE will use its considerable weight to keep SDG&E; from gaining PUC approval to complete the TEP merger. SCE earlier this year indicated that it would oppose the proposed SDG&E;/TEP merger on anti-competitive grounds.
SDG&E; “will now have to justify why it should be allowed to do the deal with Tucson,” Curti said. “Their answers are a little bit vague now, of course, but if it appears they rejected SCE out of hand they’ll have to put forth a lot more documentation.”
At least one disgruntled shareholder has filed suit against SDG&E;, alleging that the utility board has not taken SCE’s merger offer seriously. Attorney William Lerach of San Diego, who filed the suit, was not available for comment..
However, “a class-action suit will seek to determine how much deliberation actually went into this decision,” Curti said. “If the stock goes down a lot, the board will be on the hot seat.”