SDG&E; Agrees to Edison Merger Worth $2.4 Billion

San Diego Gas & Electric directors on Wednesday approved a $2.4-billion merger with Southern California Edison, the first step toward creating the nation’s largest investor-owned electric company.

The merger, which must be approved by shareholders of both companies and state and federal regulators, would create a massive utility with 4.8 million customers and $8.2 billion in annual revenues. After completion of the merger, which is expected in late 1989 or early 1990, Edison’s service territory would extend to the Mexican border and encompass one of the nation’s fastest-growing markets for electricity.

Howard P. Allen, chairman of Edison’s parent company, SCEcorp, repeated Wednesday his earlier promise that Edison will seek a 10% decrease in residential rates for SDG&E;’s customers within six months of completion of the merger.

Allen said the merger also offers SCEcorp the potential for operational savings of about $160 million a year, which can help keep electric rates down.

About 1,000 jobs--including many top-level jobs in San Diego--will be eliminated from the combined companies over the next few years, Allen said. However, he pledged that employees and officers of SDG&E; will be treated fairly and have job and promotion opportunities.

The San Diego operations of the merged utility will continue to operate as a division, retaining the name San Diego Gas & Electric Co. for at least two years after the merger, Allen said. SDG&E; Chairman Thomas Page would become vice chairman of SCEcorp and president of its San Diego division.

Allen also hinted that SCEcorp might one day relocate part of Edison’s utility business in San Diego. However, he ruled out moving Edison’s 4,000-member headquarters staff to San Diego.

Spokesmen for the city of San Diego and a San Diego consumer group argued that Edison will be hard-pressed to produce lower rates after the merger.

“There’s no substance to Mr. Allen’s claims that he can cut $160 million through the merger,” according to Michael Shames, executive director of Utility Consumers Action Network. “It seems that customers are going to take all the risks and (Edison) will enjoy all the benefits.”

“SDG&E;’s rates are going down and as of Jan. 1, 1989, they might be lower than (rates charged by) Edison,” Shames said. “There could be strong evidence that the merger would actually be detrimental to SDG&E;’s rates.”

City Atty. John Witt claimed to have “potential evidence” that the merger, as proposed, would actually increase rates paid by SDG&E;’s existing customers. Witt said that San Diego might try to buy the 107-year-old utility rather than allow Rosemead-based SCEcorp to gain control through the proposed merger.

“If San Diego wants to pay what we paid (for SDG&E;), then they should join the bidding,” Allen said.

Page expressed “serious doubts” that a municipally owned utility could offer rates as low as those to be produced by the Edison/SDG&E; merger.

Based on Wednesday’s closing stock prices, the proposed merger would increase the value of SDG&E; common stock to $42.90 per share. SCEcorp had offered 1.3 shares of stock for each share of SDG&E.; SDG&E; closed up 25 cents a share at $39.375. SCEcorp closed up 12.5 cents at $33. However, the actual value of the deal will be determined by the two companies’ stock prices when the merger is completed.

SDG&E; shareholders “got a great deal,” according to Steve McNamara, an industry analyst with Los Angeles-based Bateman Eichler, Hill Richards. “This deal was pretty much inevitable and SDG&E;’s board decided in the best interest of their shareholders.”

“Since Monday, SDG&E; has risen by $3.25, which isn’t a bad return for a couple of days’ work,” according to Irving Katz, a San Diego-based industry analyst with Thomas Green/San Diego Securities.

The proposed merger will dilute the value of SCEcorp by 6.8%, but that dilution would “eventually be made back in (improved) price-earnings ratios over a period of time,” Allen said Wednesday.

Page and Allen expressed optimism that the merger would clear several important regulatory hurdles.

The California Public Utilities Commission will study the merger during a yearlong series of hearings that will begin early in 1989. The Federal Energy Regulatory Commission will conduct a similar review.

State Sen. Herschel Rosenthal (D-Los Angeles) on Monday asked state Atty. Gen. John K. Van de Kamp to determine if there are “antitrust problems that militate against consummation of the deal or substantial alteration of its terms.”

Wednesday’s board vote, however, might have ended SDG&E;’s hard-fought struggle to remain independent of the larger Edison utility. SDG&E; began that fight on June 13 by announcing a planned merger with Tucson Electric Power, an Arizona utility with a glut of electricity and an impressive electric power transmission grid.

SCEcorp on July 26 surprised SDG&E; by offering to buy it for $2 billion in stock. SDG&E; rejected that bid on Sept. 1 and moved instead to complete its previously announced merger with Tucson Electric.

On Nov. 3, SDG&E; and Tucson Electric unexpectedly abandoned their planned merger, citing anticipated strong opposition during PUC hearings.

SCEcorp on Nov. 23 unveiled its most recent, $2.4-billion bid.

Page acknowledged that SCEcorp’s merger offer “quite frankly got in the way of our desire to remain independent.” However, Page quickly added that SDG&E;’s board “had no choice from a financial perspective. . . . There were immediate and substantial benefits for our shareholders.”

Allen said that SCEcorp has committed to maintaining and increasing support of charitable, cultural, educational and business civic activities in the San Diego area, and the level of purchases of materials and services from San Diego-area firms.

“We know that we’re somewhat unwanted by some segments of this community,” Allen said. “But we pledge to cooperate with and support the San Diego community in every way. San Diego will be the largest city in our service territory, and it will receive our fullest and best attention.”

Edison serves about 800 cities in Southern and Central California, but not Los Angeles, Burbank, Pasadena, Glendale, Anaheim or Riverside.