UPDATE: Northeast Utilities To Buy NStar For $4.3 Billion In Stock

Northeast Utilities (NU) has agreed to buy fellow New England utility company NStar (NST) for $4.3 billion in stock, creating a dominant utility for the region.

The deal is a merger of equals not meant to provide a premium for shareholders. NStar holders will get 1.312 shares of Northeast Utilities for each share of NStar, valuing it at $40.28 each. That's based on a 20 day average and provides a 1.9% premium to Friday's closing price.

Northeast Utilities shares were recently up 11 cents, or 0.4%, at $30.81. NStar's stock, which has been trading just off of its all-time high, rose 75 cents, or 1.9% to $40.28.

Deal activity in the power sector has picked up in the last year in the face of weak electricity demand as some utilities look to bolster balance sheets to pursue major infrastructure projects. Yet winning state approval continues to be a challenge to consolidation.

The combined company to be called Northeast Utilities would operate six regulated electric and gas utilities in three states, serving nearly 3.5 million electric and gas customers. The combined company would have generated $8.5 billion in revenues in 2009. The companies expect the deal to add to earnings in its first full year.

Northeast Utilities would increase its financial strength through the deal and deliver a higher dividend to shareholders. The merger eliminates the need for the Hartford-based company to sell equity in 2012. Northeast Utilities will raise its dividend by 20% to match NStar's payout level.

As for NStar, executives for the Boston-based utility said the deal adds growth opportunities and diversifies the company beyond Massachusetts. Northeast Utilities has a pipeline of high-voltage transmission projects it is building in New England, including lines to move electricity generated by wind from rural areas. Earnings for the combined companies are expected to grow at 6%-9% a year, executives said.

"Normally a merger of equals is not a good move," but the circumstances of cash-strapped Northeast Utilities and cash-flush NStar makes it an attractive move, said Gabelli & CO. utility analyst Tim Winter.

The deal will need approval from state regulators in Massachusetts. During a conference call Monday, Northeast Utilities Chairman and Chief Executive Charles Shivery said he doesn't anticipate trouble getting the deal approved in Massachusetts because "this is a no premium transaction" and a rate freeze over the next couple years means that customers will not be affected.

Utility deals have traditionally stumbled at the state level, yet after a drought in major transactions more companies are trying mergers.

FirstEnergy Corp. (FE) is in the midst of trying to acquire Allegheny Energy Inc. (AYE), while PPL Corp. (PPL) is buying the Kentucky utility operations of German utility giant E.ON AG (EONGY, EOAN.XE).

The cost savings the two companies plan from the deal remains unclear. Executives declined to give details during a conference call. They did say they see "significant ways" to improve productivity in information technology and various processes, and they gave a "rule of thumb" that every $10 million in pre-tax benefits from the deal adds about 2 cents a share to pro forma earnings.

Northeast Utilities and NStar have worked together in the past, collaborating to develop $1.1 billion of electric transmission line that would link eastern Canada and the Northeastern U.S.

As part of the deal, Shivery would become the non-executive chairman of the company for 18 months, while NStar Chairman and Chief Executive Thomas May would become president and chief executive. He would become chairman as well after Shivery's tenure.

Nstar's May said that the company is canceling a $75 million stock buyback program because of the merger. A $125 million buyback has been completed.

-By Naureen S. Malik and Nathan Becker, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

(Nathan Becker contributed to this article.)

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