Investopedia: Does Getting Bigger Make Duke Energy Better?

Utility deals are not like other deals. Utilities do not buy each other to get access to cutting-edge technology or popular products nor to take a competitive asset off the market so that it cannot fall into a competitor's hands. Instead, utility mergers are often about finding a few tenths of a percentage of savings here or there and perhaps about creating a more desirable profile of operating markets. To that end, then, it does not really seem all that likely that Duke Energy's (NYSE:DUK) acquisition of Progress Energy (NYSE:PGN) is going to be the start of a wave of utility M&A. 

The Deal as It Stands
Duke Energy announced Monday morning that it had reached an agreement to acquire Progress Energy in an all-stock deal. Duke will give each Progress Energy shareholder 2.6125 shares of its stock - a ratio that valued Progress Energy at $46.48 per share based on Friday's closing prices. That in turn represents a 4% premium to Progress's Friday close, and a 7% premium to the price of the utility before deal chatter started to build and push the stock higher.

A Logical Deal ... To a Point
Assuming that the various regulators allow the deal to go through unchanged (more on that later), it will produce the largest utility in the country with over $8 billion in annual operating EBITDA and 57 gigawatts of generating capacity in the U.S.. Impressive as that sounds, it is still a small fraction of the total U.S. electrical generation market.

Where this deal makes sense is in the familiar operating environments of the two companies. For both banks and utilities, the Southeast U.S. is an attractive market for the same basic reasons - above-average population growth and relatively friendly regulatory regimes. Both utilities are major players in the utility-friendly Carolinas, and Progress will give Duke good exposure to the also-friendly (and attractive) market of Florida and increase the percentage of earnings it gains from regulated markets.

Beyond that, this deal will help to mitigate some of Duke's risk exposure to possible troubles in Ohio and Indiana. In Ohio, for instance, Duke is losing out to competitive suppliers due to above-market rates and is trying to convince regulators to allow it to move to "market rate option" pricing. 


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