Merger Creating Largest Electric Utility in Danger
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As I monitor the fallout from the merger of Duke Energy (NYSE: DUK) and Progress Energy (NYSE: PGN), I can only shake my head. Just two weeks ago, I applauded the two coming together to form the country’s largest electric company. Now, it seems the transaction will go down as one of the pettiest handled in the sector’s history.
That is, if it is allowed to stand at all.
In case you haven’t heard about the events that have led to the uncertainty surrounding the $32 billion transaction, this is it in a nutshell. After being in the works for more than 18 months, Duke Energy and Progress Energy, both based in North Carolina, finally merged on July 2. Terms of the deal included Progress Energy’s CEO Bill Johnson becoming CEO of the merged company.
However, that didn’t happen. Johnson says he was forced to resign by a majority of the members of the board of directors just hours after the deal was inked. His ousting happened even though a term of the deal was that he becomes CEO of the merged company.
Sadly, it has turned into a case of ‘he says, he says.’ Johnson is pitted against Duke Energy’s board of directors, as lawsuits are filed and state regulator hearings are held to get to the bottom of what went wrong and caused the sudden, surprise change.
Of all my years of reporting on the utility sector and mergers, I’ve never heard of a breakdown like this. It’s clearly rooted in some very clever maneuvering done by Duke Energy’s board of directors that led to the forced resignation of Johnson. Why in the world would this be done considering it jeopardizes the merger? What I do know is that it calls into question the leadership of the company, and that is always a threat to shareholder value.
As often occurs in major mergers like this, the devil is in the details. Before the merger, Progress Energy and Duke Energy had about 1.3 billion shares of common stock outstanding. Duke Energy’s certificate of incorporation allows for it to only have two billion shares of common stock outstanding without shareholder approval.
Duke Energy saw completing a 1-for-3 reverse stock split as the viable way to reduce the amount of its outstanding stock and avoid issuing new shares of its common shock to the former holders of Progress Energy common stock. It would have had to issue about 750 million new shares to them.
The change has raised the ire of the North Carolina Utilities Commission, which approved the deal, and has the power to dismantle the entire thing. It’s heard testimony from Rogers and Johnson and has demanded that some of Duke Energy’s board members also come before it to explain themselves. This meeting was slated for Friday, July 20, but at the time of writing, it was not clear if the members would oblige. They’d requested a delay.
Also at the time of writing, at least one shareholder had filed a lawsuit. Plenty of law firms will be clamoring to get a class action lawsuit together. So far, Duke Energy is calling them baseless.
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