The Latest in Power Mergers

After years of boring predictability, it seems that a good deal of M&A excitement has come to the power sector, the latest being utility giant AES's (NYSE: AES  ) announcement of its $3.5 billion merger with DPL (NYSE: DPL  ) . Before getting into what the merger means, let's take a peek at DPL's latest third-quarter numbers.

Powering down
On the whole, DPL saw a pretty uninspiring quarter, with a 1% revenue decrease to $511.8 million. The decline was a result of poorer retail sales volumes, which were partially offset by higher retail rates, wholesale sales volumes, and wholesale average prices.

Retail revenues increased by 2% to $410 million, chiefly because of a 3% lift in average retail rates, but to some extent got offset by increased customer shopping and a 2% decrease in retail volume in terms of sales.

Wholesale revenues increased by an appreciable 30% to $40.7 million, because of a 16% increase in average wholesale prices and a 12% increase in wholesale sales volumes.

While total revenues declined by 1% for the third quarter, the company's net income also dropped 22% to $67 million, because of higher fuel costs along with operational and maintenance expenses.

Merger plans
DPL announced in September that its shareholders voted in favor of a merger with AES and its subsidiary. The deal has now been sealed, with AES willing to pay $3.5 billion for DPL's shares. DPL shareholders will get $30 per share, while AES will take up DPL's $1.2 billion in debt.

But the cost of the merger isn't limited to the DPL's debt. AES will also have to prepare itself for enormous capital expenditures on environmental-plant upgrades.

Apart from those costs, this deal should allow AES to save an estimated $5 million to $10 million every year. DPL, which runs 3,800 megawatts of power-generation service, has more than 500,000 customers in the West Central Ohio region, which will add to AES's regulated power capacity in the region. The acquisition should add value to AES's regional presence, too.

Power-packed deals
A string of deals by power companies has emerged on the back of a one-two punch dealt by falling power prices and stricter environmental norms entailing costly grid upgrades.

Duke Energy (NYSE: DUK  ) is currently working on a merger with Progress Energy (NYSE: PGN  ) in a $13.7 billion deal and plans to sell its Ohio-based power plants for $3.8 billion because of shrinking profit margins and fewer customers.

PPL (NYSE: PPL  ) has already jumped on the Deal Street bandwagon with its acquisition of German utility E.ON AG's U.K.-based power infrastructure for $5.7 billion.

Besides the dealmakers, there are some companies -- among them Southern (NYSE: SO  ) and DTE Energy -- complaining to the EPA that calling for new standards within just three years could potentially undermine the reliability of the electrical grid.

Power struggles
Though analysts have claimed that there will be a good deal of consolidation in the domestic power sector, there have been some hiccups in the past.

History is witness to cases of merger plans going sour because of regulatory problems, two examples being the planned mergers between FPL Group with Constellation Energy and Exelon (NYSE: EXC  ) with Public Service Enterprise Group. In those cases, regulators hungered for massive concessions from companies planning to tie the knot, in the form of rate reductions.

Though AES expects regulatory approval within six to nine months, one analyst said that "given the amount of leverage and the credit quality issues associated with this one, you would continue to see a considerable amount of scrutiny."

The Foolish takeaway
Given the increased regulatory pressures on this industry in the form of environmental and pricing regulations, investors can expect continued consolidation in the power sector as a whole. For now, I'd stick to the biggies like AES that have enough money to power ahead with acquisitions that will add overall value. If you'd like to keep an eye on those companies, follow the links below to add them to your free, personalized stock watchlist:

Fool contributor Keki Fatakia holds no shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Exelon and Southern and creating a write covered strangle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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