Resistance likely for FirstEnergy-Allegheny deal

February 11, 2010

Ohio-based power company FirstEnergy aims to take over Pennsylvania’s Allegheny Energy in an all-stock deal worth $4.7 billion, but getting this deal done is going to be much harder than just flipping a switch.

With no less than 10 regulated utilities across seven states, a merger landscape littered with dead utility deals and a not-too-distant history of power problems, FirstEnergy’s target completion horizon of about a year may be a bit optimistic.

Allegheny’s shares rose 11 percent, far short of the premium of 32 percent that FirstEnergy offered, indicating investor skepticism that the deal will be completed. Recall the trouble this sector has seen getting deals done. FPL Group failed to merge with Constellation Energy, and Exelon and Public Service Enterprise Group saw their deal fall apart. Both were felled by regulatory clubs.

And residents of the Northeast and Midwest will remember the name FirstEnergy when recalling the transmission line failure that swept across the power grid and knocked out electricity across eight states and into Canada on Aug. 14, 2003. The company has also suffered several problems at its Davis-Besse nuclear reactor, including a water pump emergency in 1985 and a hole in a reactor pressure vessel head that forced the shutdown of the plant from 2002 to 2004.

Though analysts are saying that the target is not too expensive, the current climate for this particular merger may prove to be deadly.

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