Duke to Buy Cinergy for $9B in Stock

Duke Energy Corp. (DUK) on Monday said it agreed to buy smaller power company Cinergy Corp. (CIN) for about $9 billion to diversify its fleet of power plants in the Midwest and revive a struggling wholesale power business.

Duke's merchant energy business DENA is expected to turn profitable once combined with Cinergy's own merchant fleet, promising to remove a consistent drag on Duke's earnings in recent years.

Merchant power plants sell power to the wholesale markets rather than retail customers. A volatile business, the merchant sector was plunged into disarray following Enron's collapse.

The deal will also allow Cinergy's coal-fired power generation fleet — which is short on capacity at peak times — to complement Duke's gas-fired plants in the Midwest that have excess capacity.

"It's a great marriage of our Midwest facilities that we hold in DENA with their Midwest facilities," Duke Chief Executive Paul Anderson said in an interview. "They are short power in the Midwest, we are long power in the Midwest. They are heavily dependent on coal, we are 100 percent gas."

Charlotte, N.C.-based Duke also expands its reach outside the East Coast by adding Cinergy's retail customers in Ohio, Indiana and Kentucky.

Already among the largest U.S. utility companies, Duke's electric operations will now rank among the top five in the United States while its gas business will become the largest in North America — giving it the flexibility to potentially split the operations, Anderson said.

"The company achieves much more scale, geographic diversity and fuel diversity," Merrill Lynch said in a research note.

Duke has spent much of the past two years bouncing back from an ill-fated foray into the once booming power and gas trading business that collapsed following Enron's demise. It has worked to sell off noncore assets, slash debt and restructure its money-losing merchant energy unit.

Duke's offer is worth $45.80 a share, a more than 13 percent premium to Cinergy's closing share price of $40.38 a share on Friday.

Under the terms of the deal, Cinergy shareholders will receive 1.56 shares of Duke for each share they hold. Cincinnati-based Cinergy has about 198 million shares outstanding, according to a company spokesman, valuing the deal at $9.07 billion.

"For Cinergy shareholders this is a home run," said Gordon Howald, analyst with Natexis Bleichroeder. "It's a natural extension of where they've been headed."

Like most deals in the utilities industry, Duke has a long list of regulatory approvals it must obtain — from nine state and federal regulators in total. Despite the morass of approvals needed and expected resistance from consumer groups, Anderson said the legal and regulatory risks were manageable.

The companies expect to make regulatory filings by July and receive the approvals in about 12 months.

Duke may also be forced to divest its real estate operations under utilities law, but would have several years to do so if required to, Anderson told Reuters.

Duke expects to save as much as $400 million annually as a result of the deal. About 1,500 jobs — or about 5 percent of the companies' combined work force of 29,350 — will be shed, mainly through attrition, early retirements and other severance programs.

Cinergy shareholders will own about 24 percent of the combined company while Duke shareholders will own the remaining 76 percent. The new board will be made up of 10 members named by Duke Energy (search) and five nominated by Cinergy (search).

Duke's Anderson will become chairman while Cinergy's top executive, James Rogers, will assume the post of CEO and president.

The deal — which the companies had been discussing since late last year — is expected to be accretive to Duke's earnings in the first full year of operation as a combined company. Anderson declined to specify how much in earnings the deal would add, but Merrill Lynch estimated it could boost earnings by 10 percent.

Duke also announced a 12.7 percent dividend hike in conjunction with the deal.

Under the agreement, Duke will receive $300 million if Cinergy terminates the deal while Cinergy will take home $500 million if Duke calls it off.

Shares of Cinergy closed up 4.8 percent, or $1.94 a share, to $42.32, while Duke shares were down 1.8 percent, or 54 cents, to $28.82 a share.