Acquisition - Part 2
National Grid Group PLC
5 September 2000
PART 2
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN OR INTO
CANADA, AUSTRALIA OR JAPAN
NATIONAL GRID ANNOUNCES $3.0 BILLION AGREED ACQUISITION
OF NIAGARA MOHAWK DOUBLING SIZE OF US OPERATIONS
1. Introduction
National Grid and Niagara Mohawk today announce that they
have signed a Merger Agreement under which National Grid
will acquire Niagara Mohawk through the formation of a
new National Grid holding company, New National Grid, and
the exchange of Niagara Mohawk Shares for a mixture of
New National Grid Shares and cash. Niagara Mohawk is the
second largest combined electricity and gas utility in
New York State serving over 1.5 million electricity and
over 540,000 gas customers.
Under the terms of the Merger Agreement, Niagara Mohawk
shareholders will receive consideration of $19.00 per
Niagara Mohawk Share, subject to the US dollar value of five
National Grid ordinary shares being between $32.50 and
$51.00 (equivalent to between 446p and 699p per National
Grid ordinary share based on an exchange rate of $1.46:£1
on 4 September 2000). In the event that the US dollar value
of five National Grid ordinary shares is greater than
$51.00, the per share consideration received by Niagara
Mohawk shareholders will increase by two-thirds of the
percentage of the increase in value over $51.00.
In the event that the US dollar value of five National Grid
ordinary shares is less than $32.50, the per share
consideration received by Niagara Mohawk shareholders
will decrease by two-thirds of the percentage of the
decrease below $32.50.
Niagara Mohawk shareholders will be able to elect to
receive their consideration in cash, New National Grid
Shares or a combination thereof, subject to the aggregate
cash consideration offered to all Niagara Mohawk
shareholders being at least $1.0 billion. If cash
elections received from Niagara Mohawk shareholders
exceed $1.0 billion National Grid may, at its sole
discretion, increase the amount of the consideration paid
in cash.
The merger terms value the equity of Niagara Mohawk at
approximately $3.0 billion (approximately £2.1 billion)
and the enterprise value of Niagara Mohawk at approximately
$8.9 billion (£6.1 billion), including net debt of
approximately $5.9 billion (£4.0 billion) as at 30 June 2000.
Based on the closing price of a National Grid ordinary share
of 560p and an exchange rate of $1.46:£1 on 4 September 2000
and assuming National Grid does not exercise its right to
increase the cash proportion of the consideration, National
Grid would issue approximately 248 million new ordinary
shares of National Grid representing approximately 14 per
cent. of National Grid's enlarged share capital. On the
same basis, the number of new ordinary shares of National
Grid which could be issued under the collar structure would
be between approximately 199 million and 312 million,
representing between approximately 12 per cent. and 17 per
cent. of National Grid s enlarged share capital.
The Acquisition is subject to a number of conditions,
including regulatory and other consents and approvals in
the US, the sale of Niagara Mohawk's nuclear facilities
or other satisfactory arrangements being reached and the
approval of the shareholders of both National Grid and
Niagara Mohawk. The Acquisition is expected to complete
by late 2001. Upon Completion, Niagara Mohawk will
become a wholly-owned subsidiary of New National Grid.
Rothschild is advising National Grid and Niagara Mohawk
is being advised by Donaldson, Lufkin & Jenrette
Securities Corporation. Merrill Lynch International and
Credit Suisse First Boston are brokers to National Grid.
2. Background to and reasons for the Acquisition
Rationale for entry into the US
In December 1998, National Grid announced its entry into
the US electricity market with the acquisition of NEES,
one of the leading transmission and distribution
businesses in the Northeast US. The US market provided
an attractive market for investment as it allowed
National Grid to exploit its core infrastructure
management skills in the world's largest energy market
and offered the opportunity for earning higher returns
than are achievable in the UK.
NEES, with its strong operational track record, was
considered by National Grid to provide a high quality
management team and an excellent platform from which to
expand the US business given the high degree of
fragmentation in the Northeast.
The success of National Grid's US strategy to date has
been demonstrated by:
* the negotiation of ground breaking long term regulatory
settlements in Massachusetts and Rhode Island, which
provide incentives for efficient management and higher
service quality; and
* the successful follow-on acquisition of EUA and its
integration into the National Grid USA business ahead of
schedule, delivering integration savings of approximately
10 per cent. of the combined controllable cost base of
NEES and EUA (over 50 per cent. more savings than
originally estimated) and with projected further
efficiency savings of some 20 per cent. of the combined
controllable cost base by 2003/4. Assuming achievement
of these savings, National Grid s annual pre tax return
on investment will be 10.5 per cent. by that date.
National Grid now expects the acquisitions of NEES and
EUA to be earnings enhancing after the amortisation of
goodwill for the year ending 31 March 2001, a year
earlier than expected at the time of announcement of the
acquisitions of NEES and EUA.
National Grid's stated strategy has been to build upon
this platform and it has continued to seek other
acquisition opportunities where it can utilise its proven
management team and integration skills to develop its US
business further.
Attractions of Niagara Mohawk
National Grid believes that Niagara Mohawk represents an
attractive next step in achieving National Grid's strategy
and offers an outstanding opportunity for National Grid.
Niagara Mohawk is the second largest combined electricity
and gas utility in New York State, focused primarily on
transmission and distribution with limited non-core
businesses. Niagara Mohawk has sold or has agreements to
sell all of its non-nuclear generation capacity in the US
and is currently in the process of selling its nuclear
generation interests. This sale process is expected to be
concluded before Completion.
Niagara Mohawk's electricity system, which interconnects
with National Grid USA's system, consists of over 9,000
miles of transmission lines and 118,000 miles of
distribution networks. In terms of customer numbers,
Niagara Mohawk is of a similar size to National Grid USA,
serving in excess of 1.5 million electricity customers.
Niagara Mohawk is also the third largest gas local
distribution company in New York State, serving over
540,000 gas customers.
Niagara Mohawk also benefits from having negotiated a
restructuring of power purchase contracts representing
approximately 80 per cent. of its above market costs and a
five year electricity rate plan with the New York Public
Service Commission. The agreements put in place, which
opened Niagara Mohawk's market to retail competition and
provided for reductions in residential, commercial and
industrial rates, provide for the recovery of the vast
majority of Niagara Mohawk's stranded costs and enable it
to recover fully market energy and capacity costs from
customers from September 2001. A three year gas rate
agreement was approved in July 2000 providing for
certainty of rates, the pass through of commodity and
transportation costs to customers and the possibility of
improved returns on investment.
For the year ended 31 December 1999, Niagara Mohawk
reported earnings before interest, tax and depreciation
of $1.3 billion on revenues of $4.1 billion and had net
assets of $3.0 billion as at that date. Further details
of Niagara Mohawk s business are set out in Appendix III.
3. Benefits of the Acquisition
The Acquisition provides a major opportunity for National
Grid to create further value in a number of areas.
Integration cost savings
Following Completion, Niagara Mohawk will be integrated
into National Grid USA. As a result National Grid expects
to achieve annual integration cost savings of
approximately $90 million through the rationalisation of
overlapping functions, principally in the administration
area. This level of savings represents some 10 per cent.
of the combined electricity controllable cost base of
National Grid USA and Niagara Mohawk. The savings are
projected to be achieved within four years of Completion
with savings of approximately 50 per cent. of this amount
achieved in the first full financial year. This level of
integration cost savings is consistent with those
achieved on the integration of NEES and EUA.
Niagara Mohawk's existing regulatory settlements provide
for the retention of the savings associated with an
acquisition or merger for a period of five years from
Completion up to the amount of the acquisition premium
paid. In addition, National Grid USA's long term
regulatory settlements in Massachusetts and Rhode Island
provide for the retention of a substantial share of any
cost reductions in its New England operations.
Improved operating performance
National Grid believes that it will create significant
value for shareholders by transferring to Niagara Mohawk
its proven skills in delivering cost efficiencies and
providing high quality services. National Grid USA
currently ranks as one of the most efficient electricity
utilities in the Northeast US on a number of cost
measures.
Niagara Mohawk's higher cost structure offers the
opportunity for National Grid to enhance Niagara Mohawk's
performance in the core transmission and distribution
business. National Grid's aim is to raise Niagara Mohawk's
operating performance over time so that it is more in
line with that planned to be achieved by National Grid
USA. However, because of Niagara Mohawk's different
operating environment, National Grid does not expect to
achieve these enhancements as quickly as is projected
with National Grid USA. In addition, National Grid USA
will work with New York regulators to structure long term
rate plans that benefit customers and shareholders and
include incentives for cost control and good customer
service.
Creation of a substantial US business
The acquisition of Niagara Mohawk is National Grid's
third US acquisition and is a further major step in
achieving National Grid's US strategy. The acquisition
of Niagara Mohawk will more than double the size of
National Grid's US operations:
* creating the most extensive transmission network and
the second largest distribution business in the Northeast
US;
* creating the ninth largest electricity utility in the
US; and
* improving the profile of the enlarged National Grid
group with more than half the group s operating profits
post Completion being derived from the US, where National
Grid is able to achieve higher returns on investment than
in the UK.
Additional upside opportunities
The Acquisition also provides opportunities to develop
the transmission business. The transmission networks of
National Grid USA and Niagara Mohawk are interconnected.
After the Acquisition the enlarged National Grid group
will be the owner and operator of the most extensive
transmission network in the Northeast US, supporting
FERC's vision of transmission being operated
independently from market participants and on a regional
basis.
The Acquisition will pool the two businesses skills and
experience of operating reliable transmission networks.
In addition, it offers opportunities for delivering
greater value to customers and shareholders under the
incentive based rate structures considered by FERC for
regional transmission organisations in its Order 2000
earlier this year.
There is further potential upside from:
* the opportunity to extend National Grid USA's existing
dark fibre telecommunications business into Niagara
Mohawk's service territory; and
* Niagara Mohawk's minority investment in Telergy, a
competitive local exchange carrier which, in contrast to
National Grid's existing telecommunications business,
provides integrated broadband telecommunications services
to large corporates and other carriers in the Northeast
US. Telergy has proposed to list its shares through an
initial public offering.
Financial impact
The Acquisition is expected to enhance earnings per share
after the amortisation of goodwill in the first full
financial year after Completion, and also substantially
to enhance cash flow per share immediately following
Completion.
Following Completion, National Grid's interest cover
(excluding exchangeable bond interest and before
amortisation of goodwill) is expected to fall to 2.5
times in 2002/03, before rising steadily to 3 times
within three years post Completion. National Grid
believes this level of cover is comfortable given the
cash generative nature of the enlarged National Grid
group and the value of National Grid's investment in
Energis. The enlarged National Grid group will have
strong operational cash flows allowing it to meet its
operating and financing requirements.
4. Board, management and employees
Board and management
A Joint Integration Committee of National Grid USA and
Niagara Mohawk, chaired by Rick Sergel, will be set up
immediately to ensure a smooth transition in the period
between announcement and Completion.
National Grid's management is confident that the good
relationship that has been established between the
management teams of Niagara Mohawk and National Grid will
assist in the negotiation of the regulatory approval
process and the subsequent integration phase. In
addition, the experience of Niagara Mohawk's management
team of operating in New York State will strengthen
further National Grid USA's management team.
Following Completion, Rick Sergel will continue as
President and Chief Executive Officer of the enlarged
National Grid USA. William E. Davis, Chairman and Chief
Executive Officer of Niagara Mohawk, will be appointed
Chairman of National Grid USA and will join the National
Grid board as an executive director for two years to
ensure a smooth transition and rapid integration. In
addition one of Niagara Mohawk's non-executive directors
will join the National Grid board as a non-executive
director.
Upon Completion, National Grid USA will be organised as
two geographic divisions covering New York and New
England. The New York division will be managed from
Syracuse, which will continue to be the headquarters of
Niagara Mohawk. In addition, following Completion a New
York Advisory Board comprising Niagara Mohawk non-
executive directors will be established for two years.
Employees
It is anticipated that career opportunities for employees
of the enlarged National Grid group will be enhanced as a
result of the Acquisition and both sets of employees will
benefit from potential transfers within the enlarged
National Grid group. National Grid has confirmed that
all Niagara Mohawk's employment agreements will be
honoured.
5. Terms of the Acquisition
Acquisition terms
The Acquisition will be effected in accordance with the
terms of the Merger Agreement, a brief description of the
principal terms and conditions of which are set out in
Appendix I. Under the terms of the Merger Agreement,
Niagara Mohawk shareholders will be entitled to receive
consideration of $19.00 per Niagara Mohawk Share (subject
to adjustment as described below).
Niagara Mohawk shareholders will be able to elect to
receive their consideration in cash, New National Grid
Shares or a combination thereof, subject to the aggregate
cash consideration offered to all Niagara Mohawk
shareholders being at least $1.0 billion.
The consideration of $19.00 per Niagara Mohawk Share will
remain fixed if the Reference Price, as defined below, is
between $32.50 and $51.00 (equivalent to between 446p and
699p per National Grid ordinary share based on an
exchange rate of $1.46 £1 on 4 September 2000). If the
reference price is above $51.00 or below $32.50, the
consideration will be increased by two-thirds of the
percentage of the increase in the Reference Price over
$51.00 or decreased by two-thirds of the percentage of
the decrease in the Reference Price below $32.50
respectively.
The 'Reference Price' will be calculated by reference to
the average closing mid-market price of a National Grid
ordinary share (multiplied by five and converted into US
dollars at the exchange rate for each day) for 20 trading
days selected at random from the 40 trading days ending
on the tenth trading day prior to Completion.
No fractions of New National Grid Shares will be issued
in connection with the Acquisition. Niagara Mohawk
shareholders who would otherwise have been entitled to
receive a fraction of a New National Grid Share in the
Acquisition will receive cash, in lieu of such fraction.
The terms of the Acquisition
* value each Niagara Mohawk Share at $19.00 (subject
to adjustment as described above);
* value the equity of Niagara Mohawk at approximately
$3.0 billion (approximately £2.1 billion) and the
enterprise value of Niagara Mohawk at approximately $8.9
billion (approximately £6.1 billion), including net debt
of approximately $5.9 billion (approximately £4.0
billion) as at 30 June 2000;
* represent a 37 per cent. premium to the closing
price of $13.875 per Niagara Mohawk Share on 1 September
2000 (the last trading day in the US prior to the
execution of the Merger Agreement) and a 36 per cent.
premium to the three month average closing price per
Niagara Mohawk Share; and
* represent a multiple of 6.9x Niagara Mohawk's
earnings before interest, tax and depreciation for the
year ended 31 December 1999 and 1.0x Niagara Mohawk's
book value as at that date.
Consideration Election and Cash Increase
Under the terms of the Merger Agreement, Niagara Mohawk
shareholders will be able to elect whether they receive New
National Grid Shares or cash or a combination of both as
consideration (a 'Consideration Election') subject to the
aggregate limitations described above. In the event that
no election is received from a Niagara Mohawk shareholder,
National Grid may, at its sole discretion, determine the
allocation of cash and New National Grid Shares received
by such Niagara Mohawk shareholder.
In addition, based on the outcome of these elections,
National Grid may, at its sole discretion, reduce the
total number of New National Grid Shares to be issued and
increase the cash component of the consideration to
satisfy in full or in part the elections made by Niagara
Mohawk shareholders to receive cash (the 'Cash Increase').
Accordingly, the ability of National Grid to satisfy each
Consideration Election will depend on other Niagara
Mohawk shareholders making offsetting elections and on
the extent, if any, of the Cash Increase. National Grid
will, so far as possible, pay Niagara Mohawk shareholders
in the proportion of cash and New National Grid Shares
for which they elect. To the extent that elections
cannot be satisfied in full, they will be scaled down on
a pro rata basis.
6. Financing the Acquisition
Under the terms of the Merger Agreement, the total
consideration payable is $3.0 billion of which, assuming
National Grid does not elect to increase the aggregate
cash consideration, approximately $1.0 billion will be
satisfied in cash provided from borrowings or cash
resources. The balance of the consideration will be
satisfied by the issue of New National Grid Shares to
Niagara Mohawk shareholders.
The number of New National Grid Shares to be issued will
be calculated based on the Reference Price and is subject
to the collar described above such that the maximum
number of new ordinary shares of National Grid to be
issued is approximately 312 million, representing
approximately 17 per cent. of National Grid's enlarged
share capital. Assuming National Grid does not exercise
its right to increase the cash proportion of the
consideration, the minimum number of new ordinary shares
of National Grid to be issued is approximately 199
million, representing approximately 12 per cent. of
National Grid's enlarged share capital.
Based on the closing price of a National Grid ordinary
share of 560p on 4 September 2000 National Grid would
issue approximately 248 million New National Grid Shares
representing approximately 14 per cent. of National Grid's
enlarged share capital.
The number of New National Grid Shares which are issued
will also be affected by any adjustment to the proportion
of the consideration which is paid in cash.
7. Scheme of Arrangement
To implement the Acquisition, it is intended that prior
to Completion National Grid will effect a Scheme of
Arrangement under which New National Grid will become the
holding company of National Grid, and National Grid
shareholders will receive, in exchange for their ordinary
shares in National Grid, new shares issued by New
National Grid having the same economic and voting rights.
The shares issued by New National Grid will be listed on
the London and New York Stock Exchanges with ADSs
representing such shares being listed on the New York
Stock Exchange following which the ordinary shares in
National Grid will be de-listed.
The Scheme of Arrangement is subject to, inter alia, the
approval of National Grid shareholders and the sanction
of the High Court in London. Under the terms of the
Merger Agreement, if the Scheme of Arrangement does not
become effective, the Acquisition will proceed using an
alternative structure to be agreed between National Grid
and Niagara Mohawk which substantially preserves the
economic benefits of the Acquisition for both parties and
Niagara Mohawk shareholders.
Further information regarding the Scheme of Arrangement
will be provided in due course.
8. Approvals and consents
Shareholder approvals
(a) National Grid
The Acquisition is subject to approval by a majority of
National Grid shareholders at an EGM. The Merger
Agreement is conditional upon such approval being
obtained and the satisfaction or waiver of the other
conditions in such agreement.
A circular relating to the Acquisition will be despatched
to National Grid shareholders as soon as practicable.
This circular will include notice of an EGM and full
details of the Acquisition and will specify the
necessary actions to be taken by National Grid
shareholders to approve the Acquisition.
(b) Niagara Mohawk
The Acquisition is also subject to approval by the
holders of a majority of votes entitled to be cast by all
the holders of Niagara Mohawk Shares and the Merger
Agreement is conditional upon such approval being
obtained.
A combined prospectus and proxy statement relating to the
Acquisition will be mailed to Niagara Mohawk shareholders
as soon as practicable after the SEC has completed its
review. The proxy statement will contain a notice
convening a meeting of Niagara Mohawk shareholders at
which they will be asked to approve the Acquisition.
Regulatory consents and timing
The Acquisition cannot be completed until a number of
conditions have been satisfied, which include the
granting of regulatory and other consents and approvals
in the US. The principal regulatory approvals required
are approval by the SEC and by the Federal Energy
Regulatory Commission together with certain approvals
from the New York Public Service Commission. The
Acquisition also requires clearance under US anti-trust
laws.
The Acquisition will become effective at the time when a
certificate of merger is delivered for filing with the
Department of State in the State of New York and the
Secretary of State of the State of Delaware, which is
expected to occur by late 2001.
Settlement, Listing and Dealing
National Grid is currently listed on the London and New
York Stock Exchanges. National Grid will be seeking a
listing on the London and New York Stock Exchanges for
the New National Grid Shares.
Further details on settlement, listing and dealings will
be included in the documents to be sent to National Grid
and Niagara Mohawk shareholders.
9. Recommendation
The Board of Directors of National Grid, which has been
advised by Rothschild, considers the Acquisition to be in
the best interests of National Grid and its shareholders
as a whole. In giving its advice, Rothschild has relied
upon the views of the Board of Directors of National Grid
of the commercial merits of the Acquisition. The
Directors of National Grid intend unanimously to recommend
its shareholders to vote in favour of the resolution to
be proposed at the EGM to approve the Acquisition, as they
intend to do in respect of their own beneficial holdings.
The Board of Niagara Mohawk has unanimously approved the
Acquisition and intends to recommend that Niagara Mohawk
shareholders vote in favour of the resolutions to be
proposed at the shareholder meeting of Niagara Mohawk to
approve the Acquisition. Donaldson, Lufkin & Jenrette
Securities Corporation, which is acting as financial
adviser to Niagara Mohawk, has provided an opinion to the
Board of Directors of Niagara Mohawk that the
consideration for the Acquisition is fair from a
financial point of view to the shareholders of Niagara
Mohawk.
10. Other
For ease of reference, in this document, all currency
conversions between pounds sterling and US dollars have
been made at a rate of $1.46:£1.00.
Enquiries
National Grid Group plc 020 7312 5600
David Jones Chief Executive
Stephen Box Finance Director
Susan Stevens Director of Group Corporate Affairs
Jill Sherratt Investor Relations Manager
Fred Mason Vice President, Corporate Communications,
National Grid USA 001 508 389 3568
Niagara Mohawk 001 315 474 1511
William E. Davis Chairman of the Board and Chief
Executive Officer
William F. Edwards Senior Vice President and Chief
Financial Officer
Joseph M. Russo Vice President, Public Affairs and
Corporate Communications
Leon Mazur Director, Investor Relations
Rothschild
UK 020 7280 5000
Nicholas Wrigley Managing Director, Investment Banking
James Douglas-Hamilton Director, Investment Banking
US 001 212 403 3500
Yves-Andre Istel Vice Chairman
Kevin Joyce Director
Matthew Savage Director
Citigate Dewe Rogerson 020 7638 9571
Anthony Carlisle
Duncan Murray
DLJ 001 212 892 3000
Michael Ranger Managing Director
Gavin Wolfe Vice President
This announcement does not constitute an offer or
invitation to purchase securities.
These materials contain certain statements that are
neither reported financial results nor other historic
information. These statements are forward looking
statements within the meaning of the safe-harbor
provisions of the U.S. federal securities laws. Because
these forward-looking statements are subject to risks and
uncertainties, actual future results may differ
materially from those expressed in or implied by the
statements. Many of these risks and uncertainties relate
to factors that are beyond the companies' ability to
control or estimate precisely, such as future market
conditions, currency fluctuations, the behaviour of other
market participants, the actions of governmental
regulators and other risk factors detailed in National
Grid's and Niagara Mohawk s reports filed with the SEC.
Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of
the date of this document. The companies do not
undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect
events or circumstances after the date of these materials.
In connection with the Acquisition, National Grid and
Niagara Mohawk will file a combined proxy statement and
prospectus with the SEC. Investors are urged to read the
combined proxy statement and prospectus and other
documents filed with the SEC when they become available,
because they will contain important information
concerning the transaction. Investors will be able to
obtain a free copy of the combined proxy statement and
prospectus (when available) and other documents filed by
National Grid and Niagara Mohawk at the SEC's website,
http//www.sec.gov or at the SEC s public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20459. In
addition, documents filed by Niagara Mohawk with the SEC
can be obtained by contacting Leon Mazur, Niagara Mohawk
Holdings, Inc. 300 Erie Boulevard West, Syracuse, NY
13202, telephone: 001 315 474 1511. Documents filed with
the SEC by National Grid can be obtained by contacting
David Forward, National Grid Group plc, 15 Marylebone
Road, London NW1 5JD, telephone: 020 7312 5600.
Niagara Mohawk, its directors, executive officers and
certain other members of Niagara Mohawk management and
employees may be soliciting proxies from Niagara Mohawk
shareholders in favour of the Acquisition. Information
concerning the participants will be set forth in the
combined proxy statement and prospectus when it is filed
with the SEC.
N M Rothschild & Sons Limited, which is regulated in the
UK by The Securities and Futures Authority Limited, is
acting exclusively for National Grid and no one else in
connection with the Acquisition and will not be
responsible to anyone other than National Grid for
providing the protections afforded to their customers or
for giving advice in relation to the Acquisition.
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