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. MORE TO FOLLOW
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