AES of Arlington, Va., with operations on five continents, offered last week to pay $30 a share to acquire all common shares in Dayton Power and Light Co.’s corporate parent. The sale, structured as a merger, would not affect consumer rates. DPL shareholders are to vote on the deal in mid-July — Wednesday’s annual meeting is being postponed — with closing expected in six to nine months, following regulatory approvals.
Shareholder concerns are echoed by the business news service Bloomberg, which reported that, while DPL has the highest profit margin among similar-sized utility companies, the AES offer of a 9.5 percent premium is “the cheapest ever for an all-cash takeover of a U.S. electric utility.”
Several shareholders told the Dayton Daily News they’re concerned they’ll suffer a significant federal capital gains tax hit in the sale and not be able to maintain the revenue stream they’ve enjoyed with DPL.
“I’m going to end up with a $25,000 tax bill,” said Waynesville attorney Robert Krebs, who owns about 8,600 DPL shares. “This tax liability issue is terrible. I just don’t think (DPL officials) got the best deal for the shareholders.”
Sale proceeds would be subject to a capital gains tax rate of up to 15 percent, reducing the amount DPL shareholders would have to reinvest elsewhere. Unlike DPL, AES doesn’t pay dividends.
Within hours of Wednesday’s merger announcement, plaintiffs’ attorneys began lining up, soliciting DPL investors to explore proposed class action lawsuits to protect shareholder interests.
DPL Chairman Glenn Harder said DPL officials will make their case for the deal in a proxy statement to be sent to shareholders within two months. DPL directors unanimously support the sale.
“I just would hope that people would take time to read the proxy,” Harder said. “I really do think this is in the best interest of shareholders and perhaps, after they read it, they’ll also come to that opinion — if they have a negative one now.”
Harder said he, too, will have to pay capital gains taxes on the more than 16,000 DPL shares he owns. DPL negotiated the best all-cash offer it could obtain, which still allows AES to start showing increased earnings within a year of acquiring DPL, he said.
Under the merger agreement, DPL is to adopt a retention program for key executives before the deal closes. DPL noted that officers and top managers are covered by change-of-control agreements in their employment contracts which spell out severance and other compensation in the event of a sale or merger.
“When they talk about retention plans, they’re talking about more compensation. It’s basically a bonus to stay,” said University of Dayton law Professor Harry Gerla, a former attorney for the Securities and Exchange Commission. The DPL retention plan presumably would offer higher compensation than the “golden parachutes” in change-of-control agreements to entice the leadership to stay in place, he said.
Workforce to stay intact through 2013
Under the merger agreement, AES agrees not to cut the DPL work force of 1,500 through 2013. But AES North America President Ned Hall said the company hopes eventually to save $30 million to $40 million a year, in large part by centralizing certain functions duplicated by DPL and AES-owned Indianapolis Power & Light Co.
“I wonder what that will mean for jobs” in Dayton, Gerla said. “In the long run, if they want to realize these centralization efficiencies, somebody’s going to have to go.”
There will be little, if any, early impact on DP&L customers. The utility’s rates are set through the end of 2012, under a plan previously approved by Ohio regulators. DP&L is to keep its name and Dayton offices for at least two years.
In a 55-page merger agreement filed Wednesday with the SEC, DPL revealed it would have to pay AES a $106 million fee if it terminates the merger deal, or a $53 million fee if DPL backs out after receiving a superior offer from another bidder.
After Wednesday’s announcement, DPL’s share price shot up from $27.59 to end the week at $30.32, more than twice AES’s Friday closing price of $13.01. If Wall Street pushes DPL’s price notably above AES’s $30 bid in coming weeks, shareholders could push for an improved offer.
Termination fees are typical in takeover transactions to protect the acquiring company that has gone public with a buyout offer. AES, with $17 billion in annual revenue to DPL’s $1.9 billion, plans to make DPL and its subsidiaries part of AES when the deal is closed.
Harder said Friday that he doesn’t think the termination fees are burdensome compared with the $3.5 billion AES offered for DPL’s approximately 117 million outstanding common shares. AES also agreed to absorb $1.2 billion of debt from DPL, bringing the cost of the deal to $4.7 billion.
The merger agreement makes no provision to pay holders of DP&L preferred stock. Mitchell Almy, a Portland, Ore., investment advisor who holds 1,000 such shares, said DPL has a legal obligation to pay $101 for each of at least 220,000 preferred shares in existence. That’s a payout of $22 million, less than 1 percent of the merger’s cost.
Almy said he fears AES might not pay the DP&L preferred investors because the merger is with DPL the holding company, not DP&L. Harder said he couldn’t comment on Almy’s case, but DPL would meet all its legal obligations after a sale. “If he’s right, the terms under which those preferred stocks were bought would still be in place,” Harder said.
Bumpy ride in Indiana
AES had a bumpy ride a decade ago when it absorbed Indianapolis Power & Light Co. parent IPALCO. That deal resulted in clashes with investors, employees and consumers, according to reports by the Indianapolis Star.
In the IPALCO deal, AES offered a swap of $25 in AES stock for every IPALCO share. The swap was approved by 65 percent of shareholders in October 2000, and the deal closed in March 2001. IPALCO shareholders could sell their shares or allow them to be converted to AES stock.
Some 1,800 Indianapolis Power & Light retirees and employees who stayed with AES lost their life savings when the stock crashed to less than $1 by October 2002.
“Everything went to hell ... because (AES) stock went down terrifically,” said Wayne Rosen, a retired investor in Jamestown, Ind., who held 4,242 AES shares after the IPALCO deal. “It was a bad situation.”
Investors filed an unsuccessful class action lawsuit claiming they were enticed to stay while executives and directors dumped their IPALCO shares to collect more than $70 million. A federal judge ruled IPALCO warned shareholders to diversify their investments.
A criminal investigation in 2004 cleared six top IPALCO officials of wrongdoing, the Star reported, including former IPALCO director Mitch Daniels, who voted for the sale then sold his stock. Daniels, now Indiana governor, said he sold because he was tapped as President George W. Bush’s budget director and wanted to avoid a conflict of interest.
Consumer watchdogs said the AES/IPALCO deal also hurt customers. Four months after the deal closed, in July 2001, a storm knocked out power to thousands of homes, the Star reported. Complaints about the utility’s efforts to restore power — it shed 400 of 1,900 employees shortly after the sale — led to a settlement establishing service quality and performance standards for Indianapolis Power & Light, with penalties of up to $7 million. The watchdogs say the utility has greatly improved since then.
Contact this reporter at (937) 225-2242 or jnolan@DaytonDailyNews.com.
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