The Exelon-Pepco Merger Approval Was 'Quite Unexpected'

Deutsche Bank’s Jonathan Arnold maintained a Buy rating for Pepco Holdings, Inc. POM, with a price target of $34, after the unexpected approval of the company’s merger with Exelon Corporation EXC.

After almost two years, the DC Public Service Commission has given its approval for Exelon’s purchase of Pepco Holdings in 2-1 vote. The deal had already received approval from all other relevant regulators and is now ready to move forward. “The approval was quite unexpected with most analysts, including us, thinking the deal was likely over,” analyst Jonathan Arnold wrote.

Revised Settlement Agreement

The commission gave its approval, albeit subjecting the deal to its own revised settlement agreement, which was issued by the PSC in February. At that time, the PSC had indicated that the deal could move forward only if all of the original settling parties agreed to the PSC’s revisions. The PSC suggested the alternative of the settling parties getting together to request other relief.

Arnold mentioned, however, that neither of these outcomes occurred. On March 7, the two companies filed recommending three options for approval: “1) approve the original settlement agreement; 2) approve the revised settlement agreement; or 3) approve an alternative agreement. The PSC ultimately selected option 2.”

Take On The Approval

“We are maintaining our estimates and price target which we had already updated to assume the merger would close at the end of Q1/early Q2,” the analyst wrote. The EPS estimates for 2016 and 2017 would have been raised by $0.05-$0.10 had the deal failed. “That said, we did not see a material impact on our EXC valuation if the deal had failed to close,” the Deutsche Bank report added.