Analysts: Exelon-Pepco merger headed for rejection
Update: The D.C. Public Service Commission today approved the Exelon-Pepco merger by a vote of 2-1. See this post for more details.
- As the District of Columbia Public Service Commission (PSC) gears up for another vote on the proposed $6.8 billion acquisition of Pepco Holdings Inc. by Exelon Corp., multiple analysts expect regulators to reject the merger.
- Guggenheim Securities LLC wrote yesterday there is a "strong likelihood" that regulators will throw out the latest version of the deal offered by Exelon and Pepco earlier this month, SNL reports. Analysts from the investment firm Mizuho Strategies made a similar forecast last week.
- Last month, the PSC rejected a settlement deal between the companies, the D.C. mayor and other stakeholders, outlining conditions that would result in automatic approval if adopted. After city leaders rejected those terms, Exelon offered a new proposal to regulators, which they are expected to vote on today in a meeting at 1 p.m. EST.
The merger that would create the largest electric utility in the nation could meet its demise today.
The D.C. PSC, the last remaining hurdle for the deal's approval, will meet today to address the proposed deal, and analysts are not confident in the companies' chances. Analysts at Guggenheim Securities yesterday said they believe D.C. regulators will reject the $6.8 billion acquisition.
The analyst note comes days after the General Services Administration, which purchases power for the federal government, urged regulators to reject the deal due to a lack of consensus among parties to an earlier settlement deal.
In February, regulators rejected the deal brokered between the companies, merger stakeholders and the District government, but placed three conditions on the settlement that would result in the merger's automatic approval if all of the parties adopted them.
After Mayor Muriel Bowser (D) and the city's ratepayer advocate rejected those terms, the companies filed a new proposal on March 7. But that proposal garnered opposition from the ratepayer advocate as well.
In their meeting today, analysts expect regulators to make a final decision on the merger, either accepting Exelon's latest proposal or throwing the deal out completely. But, as SNL notes, they could also vote to hold more hearings or allow Exelon and Pepco more time to come up with another merger proposal — a possibility that Guggenheim analysts think is unlikely.
"[Exelon] and [Pepco] could also come up with another settlement, but less likely given that a more favorable settlement could trigger the 'most favored nation' clause with other states that have already approved the merger," Analyst Shahriar Pourreza wrote, according to SNL. "They could reject the deal again since there is no consensus among parties on settlement conditions. This is a strong likelihood, in our view."
If the merger is rejected, SNL reports that Exelon is expected to buy back shares and retire debt. The potential deal is a lucrative one for Exelon, which told investors in 2014 that it could finance its entire dividend for shareholders with its regulated businesses if the Pepco merger were approved — no small benefit for a company that cut its dividend 41% the year before.
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