FE-AYE Merger Jumps Another Hurdle - Analyst Blog

Diversified Electric company, FirstEnergy Corp. (FE) received positive recommendations from four proxy advisory firms for its proposed merger with Allegheny Energy Inc. (AYE). These four independent advisors have recommended FirstEnergy shareholders to vote in favor of the proposed merger.

The four firms include ISS Proxy Advisory Services; Glass, Lewis & Co.; PROXY Governance Inc.; and Egan-Jones Proxy Services. FirstEnergy is scheduled to conduct a special shareholders meeting on September 14, 2010.

The support received from these advisors underscores FirstEnergy’s belief that the merger with Allegheny Energy will help the company to continue building shareholder value.

The deal between FirstEnergy and Allegheny Energy to combine their operations dates back to February 11, 2010. In the pact, the companies agreed to merge in a stock-for-stock transaction worth $4.7 billion.

The merger, which received unanimous support from the board of directors of both companies, requires certain approval of the majority of outstanding shares of both companies. The merger is expected to be completed in the first half of 2011.

FirstEnergy’s merger with Allegheny is expected to create a premier energy company, with ten regulated electric distribution companies, serving 6 million customers in seven states. Upon closing, this will create a combined company with roughly $16 billion in annual revenues and $1.4 billion in annual net income, based on both companies’ results as of December 31, 2009.

The merged company, with a more diversified energy delivery business and stronger generation portfolio, will enhance customer service, reliability and operational flexibility. Furthermore, it is expected to provide enhanced earnings growth and shareholder return potential and opportunity to create value through increased scale, scope and diversification. The transaction is expected to be accretive to earnings in the first full year, following the completion of the merger.

Though we are positive on the proposed merger between FirstEnergy and Allegheny, we believe there remains an element of risk regarding the smooth and timely completion of the merger due to the pending regulatory approvals. Thus, we maintain our Neutral recommendation for both FirstEnergy and Allegheny. Currently, both FirstEnergy and Allegheny retain a Zacks #3 Rank (Hold).