Duking it Out with Cinergy
06/17/2005 12:00 am EST
Reflecting the integrity and quality of his journalism, Lou Dobbs focuses on these same factors in assessing stocks and managements. Here, he updates us on two utilities—both "featured companies" in his Lou Dobbs Money Letter— which recently announced a merger.
"Duke Energy (DUK NYSE) and Cinergy (CIN NYSE) have been among our 'Featured Companies' for some time; Cinergy since August 2003, and Duke Energy since May 2004. Both have done quite well for us. Cinergy has produced total returns (including dividends) of approximately 34%, while Duke’s total returns top 40%. I’ve been impressed with the management of both companies and their attitude towards their shareholders. Now they’re joining forces.
"Duke will acquire Cinergy as part of a stock swap deal valued at about $9 billion, creating a company with a market cap of about $35 billion. The union will create one of the biggest energy companies in America with some pretty impressive numbers: more than $70 billion in assets, some $2 billion in yearly profits and combined revenues of nearly $27 billion. The new entity will have 5.4 million customers and, if all goes according to plan, the deal will be finalized within a year.
"In analyzing the merger, the two companies appear to be a good fit. The combined company gets more power-generating capacity, a huge base of existing customers, and geographic diversity. Duke’s gas-fired operations will complement Cinergy’s coal-fired plants, helping to bolster Cinergy’s power generation. At the same time, Cinergy will bring some successful merchant power to Duke’s struggling merchant enterprise, Duke Energy North America. Cinergy’s Midwest business, which is concentrated in Indiana, Kentucky, and Ohio, will add significantly to Duke’s operations, which run from Florida and the Carolinas on up to Canada.
"Now, for some of the benefits to investors: Each common share of Cinergy will be converted to 1.56 shares of Duke, which (on the day of announcement) represented a 13% premium on Cinergy’s closing price. Duke’s board said it will increase the company’s dividend to $1.24, or a rise of 13%, to be paid out in September. And both companies’ prominent top execs will be staying on: Paul Anderson of Duke will become the new company’s chairman, while Cinergy’s Jim Rogers will serve as president and CEO.
"One caveat in all this is that he SEC recently scuttled a proposed merger between American Electric Power and Central & South West, based on a 70-year-old law that requires utilities to operate in a contiguous region. Now that the SEC has dusted off this old law, we’ll have to observe how strictly it’s applied going forward, especially in the case of Duke and Cinergy. Conventional wisdom is that it won’t stop the merger, but we’ll keep our eyes on this one. It’s events like these that certainly make good investments as interesting as they are profitable. For now, Duke and Cinergy retain all of the qualities that attracted us in the first place, so we’ll be keeping them in our portfolio of Featured Companies."