SDG&E; Rejects $2.16-Billion Takeover Bid
San Diego Gas & Electric, citing a strong desire to remain independent, rejected Thursday a $2.16-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 predicted that the proposed merger with Tucson Electric would generate shareholder wealth and lower electric rates that exceed 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.
“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. . . . A $1-billion premium over book value is a top price. In our judgment, it is superior to any offer that SDG&E; is ever likely to receive.”
SCE “has no plans to further sweeten the deal,” according to spokesman Lewis Phelps. The stock swap offer “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 at $34.875 Thursday after reaching a high of $36 before the rejection was announced. SCE closed down $.125, at $32.
Electric industry analysts Thursday predicted that SCE, which has excess electrical generating capacity, will 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. “They’ll come back in with another offer,” he said, before SDG&E;’S proposed merger with TEP “gets too far down the line.”
Micheal Shames, executive director of Utility Consumers Action Network, a San Diego-based group, said, “I’m disappointed . . . that SDG&E; didn’t explore (the merger) more.
“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.”
‘Somewhat Flabbergasted’
Analysts also questioned SDG&E;’s decision not to negotiate directly with SCE’s board of directors.
“I am somewhat flabbergasted that (SDG&E;) didn’t even sit down to hear Edison’s deal,” said Shearson Lehman Hutton analyst 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% rate reduction within six months, and I don’t see that in SDG&E;’s TEP merger,” he said of the electric rate.
Page said he has not really thought about defending against a possible hostile takeover. “I wouldn’t even begin to speculate on what (SCE) will do,” he said. But Page added that he was “flattered by (SCE’s) interest in our company . . . (it indicates) that 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 at which they will vote on the proposed Tucson 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 book value. “I’m not arguing with their numbers,” Page said.
However, Page said that 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.
Electric industry analysts on Thursday were uncertain if the state Public Utilities Commission will 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 tender offer, 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.
Electric industry analysts also said that 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 earlier this month, was not available Thursday for comment.
The PUC recently began what is expected to be a yearlong review of SDG&E;’s proposed merger with TEP. More than 20 utilities, consumer groups and other organizations are taking part in that review.
Some San Diego civic leaders applauded SDG&E;’s board for rejecting SCE’s bid. “It’s great for this community because it assures that we’ll, in the long-term, remain a separate entity” from Los Angeles, said Economic Development Corp. President Daniel O. Pegg. “I’m delighted with the vote.”
However, Pegg said he would be “more than a little surprised if this is the last we hear from Allen.” Pegg and a handful of other civic leaders recently met with Allen for more than two hours to discuss the merger. Allen “made a persuasive case for why he wants SDG&E;,” Pegg said. “I have a feeling that Tom Page is going to be earning his salary.”
SDG&E;’s board made its decision to reject SCE’s bid at a special meeting Thursday morning in San Diego. “It was unanimous and all nine members voted,” Page said.
SDG&E; board members include Malin Burnham, chairman of First National Corp. and president of the Sail America syndicate that will defend the America’s Cup next week in San Diego; Intermark President Charles R. Scott; Ralph R. Ocampo, a local physician, and Clair Burgener, a former U.S. congressman and developer.
