(Reuters) - Canadian utility Fortis Inc (FTS.TO) said it will buy New York's CH Energy Group Inc CHG.N for about $1 billion to enter the U.S. state-regulated electric and gas distribution business that assures stable return amid weak power demand.
Fortis, which will also assume $500 million debt, will pay CH Energy shareholders $65 a share, representing a premium of about 11 percent to CH Energy's Friday's close.
CH Energy shares, however, were trading $1.15 above the offer price on Tuesday, indicating some investors were expecting a higher bid for the company.
"We would prefer being long-term holders, because we see an opportunity to take natural gas from Marcellus down to New York," said Mario Gabelli, the billionaire chairman of Gabelli Funds that is CH Energy's largest shareholder with a 10.36 percent stake.
Gabelli was referring to the gas-rich Marcellus shale fields in northeastern United States that has flooded the market with the clean-burning fuel.
"We would prefer to hold on to the stock for the next 2-3 years," he said.
Poughkeepsie, New York-based CH Energy's Central Hudson Gas & Electric is a regulated transmission and distribution utility serving about 300,000 electric and 75,000 natural gas customers in eight counties of New York State's Mid-Hudson River Valley.
Canaccord Genuity analyst Juan Plessis said that as the deal is expected to close within the next 12 months, there was enough time for other parties take a look at CH Energy.
The fragmented U.S. utility industry has seen a number of deals in recent years -- such as Exelon's (EXC.N) $7.9 billion offer for Constellation Energy CEG.N and Duke Energy's (DUK.N) $13.7 billion bid for Progress Energy PGN.N -- as companies look to save costs and prepare for stricter environmental regulations.
"CH Energy is a small utility and it's not that surprising they are being acquired, considering the on-going consolidation in the industry," Glenrock Associates analyst Paul Patterson said.
Fortis, which lost out to Gaz Metro for Central Vermont Public Service (CVPS) CV.N last year, had said it could spend up to $6 billion to buy assets in the United States as opportunities in Canada were few.
"We originally thought a deal would be larger at about $3 billion to $5 billion range, but I think this gives Fortis a good opportunity to get a feel for the U.S. regulated market," Morningstar analyst Andrew Bischof said.
"I would not be surprised to see them do another small acquisition like this or may be even a larger one."
Fortis, the largest investor-owned distribution utility in Canada, serves more than 2 million gas and electricity customers. It owns and operates non-regulated generation assets across Canada, Belize and upstate New York.
The deal is expected to immediately add to Fortis' earnings, excluding one-time transaction costs.
"The purchase price has an implied PE of 25, which seems a little rich at first glance," Bischof said.
Canaccord's Plessis also said the deal was pricey, but in line with recent transactions such as Gaz Metro's buyout of CVPS and AltaGas' (ALA.TO) purchase of Continental Energy Systems unit Semco Energy Inc for $1.14 billion.
Fortis is being advised by Bank of America Merrill Lynch and Lazard is advising CH Energy.
Reporting by Aftab Ahmed and Bhaswati Mukhopadhyay in Bangalore; Editing by Sriraj Kalluvila and Don Sebastian