The Baltimore Gas and Electric Co. and the Potomac Electric Power Co. have agreed to pay an $85 million termination fee to each other if either utility withdraws from their proposed merger because of an offer from another company, according to documents filed yesterday.
The termination fee structure also could exact a much higher price, in the form of company control, based on reciprocal stock options granted as part of the merger agreement.
Details of the fees, contained in 135-page 8K reports from both companies to the Securities and Exchange Commission outlining the merger, represent part of a larger agreement that binds the utilities together through March 31, 1997.
"A walkaway fee is a common event in corporate mergers today," said Alex Hart, a Ferris, Baker Watts Inc. utility analyst. "It illustrates that everybody is happy with the deal and that it's amenable to both sides. It also is used because each company wants to lock up the other, so that it would be prohibitive for someone else to come along."
In announcing the friendly merger on Monday, both sides termed the termination agreements as "substantial," but the SEC reports mark the first time specific details have been made public.
Under terms of the agreement, neither side may break the merger pact unless specific conditions occur, the documents state. Those conditions include mutual consent by the respective boards, federal or other law prohibiting the merger, an offer by a third party, or a breach resulting from significant changes to the agreement.
The stock option agreement is another sign the two power concerns are serious about executing the merger, which would create the nation's ninth-largest utility with $15.1 billion in assets. Under its terms, BGE granted Pepco an "irrevocable option" to buy $761.1 million worth of BGE common stock, or nearly 20 percent of the outstanding voting shares.
Pepco has, in turn, granted BGE a similar option to acquire up to $500.4 million worth of its stock, also representing 20 percent of the utility's shares.
With those share options -- which become effective only if the merger is terminated -- both BGE and Pepco would in essence control the other as the largest single shareholder, further locking the future of each individual company beyond 1997.
All stock option agreements become void if the merger is completed, however.
To execute the deal, BGE and Pepco have created RH Acquisition Corp. to serve as a vehicle for the merger. Both utilities control half of the new corporation, the documents note.
As with most mergers, the BGE and Pepco filings indicate that their respective investment bankers, attorneys and accounting firms must agree to numerous provisions until the union is completed.
The documents, signed jointly by Pepco Chairman and Chief Executive Edward F. Mitchell and BGE Chairman and Chief Executive Christian H. Poindexter, also list the circumstances by which either side may back out of the transaction, such as a shareholder vote against the merger.
The merger would create a company serving a population of 4.5 million. There would be 1.8 million electricity customers.
BGE would have the opportunity to expand its natural gas and appliance businesses into Pepco's territory. Pepco does not have a natural gas operation.