AGL Resources aims top slot with $2.4 billion Nicor buy

By Krishna N Das

BANGALORE (BestGrowthStock) – AGL Resources (AGL.N: ) will buy Nicor Inc (GAS.N: ) for about $2.4 billion in its largest ever deal, making it the biggest gas-only distributor in the United States at a time of surging natural gas output.

Natural gas production has boomed in recent years helped by new gas fields like the Marcellus shale, raising hopes that the fuel’s share in energy markets will rise.

With the acquisition of Nicor — parent of Northern Illinois Gas Co — AGL almost doubles its customers by adding Illinois to its existing markets in Georgia, Florida, New Jersey, Maryland, Tennessee and Virginia.

The combined company will have two-thirds of its regulated rate base in Georgia and Illinois, two of the most populated U.S. states.

After the cash-and-stock deal closes, AGL will boast of a customer base of 4.5 million, well ahead of its nearest rival Atmos Energy Corp’s (ATO.N: ) 3.2 million.

The deal comes two months after Georgia Public Service Commission let AGL’s unit Atlanta Gas Light upgrade its pipeline replacement program, paving the way for acquisitions.

The commission’s policy requires AGL to split any cost saving from acquisitions evenly with customers for ten years. AGL did not quantify any saving it expects from the deal.

“Georgia has supported our growth strategy and we are proud that we can enhance our corporate presence in Georgia while expanding gas operations in Illinois,” AGL Chief Executive John Somerhalder said in a statement.

Somerhalder will lead the combined company, to be based in AGL’s Atlanta headquarters. Its gas distribution business will be based in Nicor’s headquarters at Naperville, Illinois.

Nicor shares rose 5 percent to a year-high of $49.20, while AGL fell 5 percent to $35.26. The Dow Jones U.S. Gas Distribution index (.DJUSGU: ) rose to a year-high of 1221.92.

EXPENSIVE BUY?

Nicor shareholders will get about $53 a share — $21.20 in cash and 0.84 of AGL shares. The deal is at a premium of about 13 percent to Nicor’s closing price on Monday and a premium of 22 percent to Nicor’s price before December 1, when chatter of a possible deal came up.

“This is an expensive acquisition,” analyst Gordon Howald at East Shore Partners said in a note, cutting his rating on AGL’s stock to “hold” from “buy.”

“We are concerned by the premium AGL is willing to pay for Nicor, particularly given its strong relative peer performance in 2010 and AGL’s weak relative peer performance.”

AGL has a price-to-earnings ratio of 11.95, lowest among its peers, according to Thomson Reuters StarMine data. Nicor has a PE ratio of 13.91.

The cash part of the deal is worth about $1 billion. AGL, which has $14 million in cash and equivalents, said it has financing commitments from Goldman Sachs and also plans to raise funds via placement of bonds.

AGL may be required to pay Nicor a fee of $115 million if it fails to obtain financing, a regulatory filing showed.

S&P put AGL Resource and Nicor on “watch negative” saying regulatory approvals can take significant time.

Though the companies said there is no “go shop period,” the deal has a breakup fee of about $36 million in the near term and $67 million in the long.

Paul Patterson of Glenrock Associates said there was no guarantee that there would not be any rival bid despite the absence of a go-shop period.

“You will be seeing more mergers in future for economies of scale.”

The combined firm is expected to have annual revenue of about $5.1 billion.

AGL, whose shareholders will own about 67 percent of the combined firm, sees the deal to be neutral to earnings in the first full year after close and add to earnings after that.

Goldman Sachs & Co is acting as the financial adviser to AGL Resources while J.P. Morgan is advising Nicor.

(Reporting by Krishna N Das in Bangalore; Editing by Unnikrishnan Nair and Savio D’Souza)

AGL Resources aims top slot with $2.4 billion Nicor buy