| LONDON/NEW YORK
LONDON/NEW YORK U.S. power firm PPL Corp (PPL.N) is buying German utility E.ON AG's (EONGn.DE) UK power networks for 3.5 billion pounds in cash to create one of the largest electricity distributors in Britain.
PPL, which beat a rival bid from Hong Kong billionaire Li Ka-Shing according to people familiar with the matter, would also assume 500 million pounds of debt.
The deal, expected to close in early April, would create the largest network of electricity delivery companies in Britain in terms of regulated asset value, at a combined $7.8 billion (4.8 billion pounds), PPL said in a statement.
The E.ON business, called Central Networks, is the UK's second-largest electricity distributor and delivers power to over five million customers. It would add to PPL's existing pool of 2.6 million customers in South West England and South and West Wales.
The acquisition furthers PPL's move into steadier, regulated power provision and away from the competitive business of power generation. Units with regulated returns made up just 27 percent of earnings in 2010, but helped by the earlier E.ON deal, were already forecast to make up half of this year's earnings.
The sale would also be an important milestone for E.ON, which is shedding some 15 billion euros of assets. It would mark the second big deal with PPL, after the latter bought E.ON's Kentucky-based power unit last year for $6.7 billion in cash.
Hong Kong's Li had also pursued the E.ON assets to add Britain's second-biggest electricity distribution network to the largest, which he bought last year from EDF of France.
PPL's bid succeeded because it offered a higher price, not because Li's rival bid posed bigger competition problems, a person familiar with the matter said.
Two days ago, the Sunday Times reported Li was the frontrunner after his investment arm, Cheung Kong Infrastructure Holdings (1038.HK) (CKI), outbid PPL. But it said his bid "could be tripped up by competition concerns.
While PPL's credit ratings are already near the bottom of the investment-grade scale, the switch towards more reliable businesses will partly compensate for the extra leverage required by a cash acquisition.
PPL estimates the acquisition will be accretive to its earnings by about 10 to 15 cents per share in 2011. Assuming a closing of the deal in April, PPL said it expects to increase its 2011 earnings forecast to $2.50 to $2.75 per share, up from the current $2.40 to $2.60 per share.
"Opportunities as compelling as this do not come along very often ... There are very real opportunities for retainable synergies that further enhance what already is a compelling transaction," PPL Chief Executive James Miller said in a statement.
E.ON CEO Johannes Teyssen said the purchase price represents "excellent value" for the company and the proceeds of the sale would increase its financial flexibility and strengthen its balance sheet.
Credit Suisse CSGN.VX and Bank of America Merill Lynch (BAC.N) advised PPL on the transaction and also provided deal financing.
SOVEREIGN WEALTH FUND
E.ON put the UK networks up for sale in December as part of a promise to investors that it would divest assets worth 15 billion euros through to 2013, in order to guarantee minimum dividends while it builds up new markets.
The networks provide electricity to about 5 million homes and businesses in Birmingham and the surrounding Midlands area of England.
The businesses had a combined "regulated asset value" (RAV) of 2.81 billion pounds as of end-March 2010, E.ON said in a recent bond prospectus.
UBS analysts said recently that a sale at 3.7 billion pounds would represent a 17 percent premium to their March 2012 estimates.
E.ON, the world's largest listed utility, also fielded a joint bid from the Canada Pension Plan Investment Board (CPPIB) and Abu Dhabi Investment Authority (ADIA), the emirate's sovereign wealth fund, people familiar with the matter said in January.
Last year, Li used CKI and his other investment arm Hongkong Electric (0006.HK) to buy networks from EDF (EDF.PA) which provide power to London and southeast Britain for 5.8 billion pounds. CKI and HK Electric officials did not immediately respond to a request for comment outside normal Hong Kong business hours.
($1=.6130 Pound) (Additional reporting by Michael Erman, Editing by Douwe Miedema, Andrew Callus, Gary Hill)