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Levick Daily. Thoughts. Perspectives. Insights.

Financial Communications

North Carolina Regulators Find Fault with Duke Energy’s Bait and Switch

When Duke Energy first approached Progress Energy about a potential merger in early 2011, Duke CEO James E. Rogers assured Progress CEO William D. Johnson that he was willing to take the position of executive chairman and that Mr. Johnson would run the combined company after the $26 billion transaction was completed. The deal was sold as merger-of-equals. As such, the Progress board approved a minimal premium based on the assumption that their CEO would lead the new enterprise.
Eighteen months later, the merger closed after receiving approval from no less than six regulatory entities, all of which expected Mr. Johnson to run the company. But just hours after the deal was signed, the Duke Board ousted Mr. Johnson and put Mr. Rogers in charge. Mr. Rogers stated that the board had lost confidence in Mr. Johnson, despite the obvious fact that he never got a real shot to prove himself in the new job.
It wasn’t long before the apparent bait and switch got the attention of the State Utilities Commission in North Carolina – and an investigation was initiated shortly thereafter to learn whether or not Duke had intentionally misled regulators to win approval of the deal.
It is highly unusual for state regulators to inject themselves into board matters or demand a say in who leads a utility company; but the Commission deemed Duke’s actions so egregious that it had to step in. Reports that downsizing efforts facilitated by the deal would fall primarily on the heads of North Carolina’s Progress employees certainly didn’t help Duke’s situation. Last month, a settlement was reached that acknowledged “activities on this matter have fallen short of the Commission’s understanding of Duke Energy’s obligations.”
The concessions Duke must make as a result include Mr. Rogers’ mandatory retirement at the end of 2013; a requirement that Duke maintain at least 1,000 jobs in Raleigh for at least five years; the rehiring of several Progress executives who were let ago after the deal closed; the replacement of one of Mr. Rogers’ top lieutenants as the company’s general counsel; and that the search committee formed to select Mr. Rogers’ successor be equally comprised of four directors who sat on the Progress board before the merger and four directors who sat on Duke’s.
Meanwhile, in a clear sign that wronged executives do sometimes win, Mr. Johnson has been named as the new CEO of the Tennessee Valley Authority.
With Duke’s stock price down almost 10 percent from a high of $70 a share this summer, it’s clear that the uncertainty swirling around the investigation created even more headaches for the Duke board. At the same time, Duke’s actions have demonstrated to all potential merger candidates the importance of transparency throughout the process.
To make a deal work, regulators, employees, shareholders, and a host of other stakeholders need to know that the transaction is in their best interests – but attempts to pull the wool over their eyes won’t provide any long-term benefits, even if they do generate initial support.
As Duke Energy’s experience shows, aggrieved parties to a merger have a number of remedies available even after the ink has dried. As such, it is far better to be open and honest up front, and willing to engage in frank discussions that realistically weigh benefits and risks for all stakeholders involved.
Kathleen Wailes is a Senior Vice President at LEVICK and Chair of the firm’s Financial Communications Practice. She is also a contributing author to LEVICK Daily.

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Kathleen Wailes, Senior Strategist
Senior Strategist

Kathleen M. Wailes has extensive executive experience in corporate communications, investor relations, and transaction communications. Throughout her engagements, Ms. Wailes has facilitated successful deal completion and value enhancement for...