Exelon Corp, the largest operator of US nuclear power plants, agreed to buy Constellation Energy Group Inc for about $7.9 billion in stock, adding stakes in five reactors and becoming the largest US electricity marketer.
Constellation shareholders will get 0.93 Exelon shares for each of their shares, the companies said on Thursday in a joint statement. Based on yesterday’s closing stock prices, that values Baltimore-based Constellation at $38.59 a share, a 12.5 per cent premium, according to Bloomberg data.
If completed, it will be Chicago-based Exelon’s largest transaction. Exelon has tried unsuccessfully three times to buy other power companies since 2003, and Constellation has been the target of two failed bids. A $14.8-billion sale of Constellation to NextEra Energy Inc, the largest US wind-power generator and owner of Florida’s largest utility, collapsed in 2005, with NextEra citing interference by officials in Maryland.
“Exelon has taken the position for most of the past decade that we believed in further consolidation,” Exelon Chief Executive Officer John W Rowe said on Thursday in a telephone interview. A deal had to add to earnings and cash flow, maintain investment grade ratings and include green investments, he said. “This merger meets all of those tests. This is a straightforward winner for both companies.”
Rowe, 65, will step aside as chairman to Constellation Chief Executive Officer Mayo Shattuck III, 56. Christopher Crane, 52, now Exelon’s president, will become CEO of the combined company.
UNSUCCESSFUL BIDS
The deal needs approval by state utility regulators in Maryland, New York and Texas, in addition to shareholders of both companies and federal regulators, Exelon said on Thursday.
Exelon promised each customer of Constellation’s Baltimore Gas & Electric utility a $100 rate credit within 90 days of closing. It promised no job cuts at the utility for at least two years and said the “growth engine” of competitive power sales and generation from renewable sources including wind will be based in Baltimore.
Exelon also promised to sell three Maryland power plants to reduce the combined company’s market share in PJM Interconnection LLC, the largest US wholesale power market. Exelon’s $25.9 billion bid for Public Service Enterprise Group Inc. foundered in 2004 over market-power concerns by New Jersey utility regulators.
“State regulators are likely to be a key hurdle,” Christine Tezak, a Washington-based energy policy analyst for Robert W Baird & Co wrote on Thursday in a note to clients. Federal regulators also have changed merger requirements since Exelon won US approval for the Public Service deal, she wrote.
DEAL PREMIUM
Exelon is paying a 16 per cent premium based on the average closing price of both stocks over the past 20 days, below the 19 per cent average of 456 US power company deals over the past five years, according to data compiled by Bloomberg. Exelon is paying 6.9 times earnings before interest, taxes, depreciation and amortization, compared with an average 7.2 times.
Constellation operates three nuclear plants in Maryland and New York. With 2010 sales of $10.9 billion, Constellation’s competitive marketing and power-generation businesses accounted for 76 per cent of revenue, according to data from filings compiled by Bloomberg.
“Constellation has a substantial retail marketing business and Exelon has a whole lot of wholesale power to sell,” Paul Patterson, a New York-based utility analyst at Glenrock Associates LLC, said in an interview yesterday.
Exelon’s latest planned purchase comes after setbacks to nuclear reactor construction projects in the competitive US markets of Maryland and Texas, and amid concerns about the safety of atomic power in the wake of the crisis at the Fukushima Dai-Ichi plant in Japan.
DIMINISHED PROSPECTS
“The deal makes a lot of sense in terms of nuclear concentration, because of the economies of scale,” said Daniele Seitz, a New York-based utility consultant. “Expanding their nuclear generation is a positive, especially considering that future construction will be at a very slow pace.”
NRG Energy Inc, the largest US independent power producer, this month canceled its plans to build two new reactors at a Texas nuclear plant, citing diminished prospects after a partial meltdown at Tokyo Electric Power Co.’s Dai-Ichi plant spread radiation across parts of northern Japan. Exelon itself suspended plans for a new Texas nuclear plant in 2009.
Constellation in October withdrew from a joint venture to build a new reactor with Electricite de France SA, citing excessive costs and a dim economic outlook for power prices. Southern Co and Scana Corp are continuing plans to build new reactors in Georgia and South Carolina with financing backed by state-regulated rates.
US FOOTHOLD
EDF, seeking a foothold in the US to build reactors designed by Paris-based Areva SA, defeated a $9.5 billion offer in 2008 for all of Constellation from Warren Buffett’s Berkshire Hathaway Inc. The next year, EDF bought a minority stake in Constellation’s nuclear plants for $4.5 billion in cash.
The French utility still has a 7.3 per cent holding in Constellation, according to data compiled by Bloomberg. EDF, the second-largest shareholder in Constellation, said in a statement that it’s studying the terms of Exelon’s offer.
Constellation used the money to shore up its energy- marketing business and avert bankruptcy after the 2008 financial collapse. The company’s shares have risen 19 per cent since it rejected the Buffett offer.
Exelon rose 9 cents to $41.58 at 9:41 a.m. in New York Stock Exchange composite trading. Constellation rose $1.52, or 4.4 per cent to $35.82.
Barclays Plc, JPMorgan Chase & Co., Evercore Partners Inc. and Loop Capital Markets are serving as financial advisers to Exelon. Morgan Stanley & Co., Goldman Sachs & Co. and Credit Suisse Securities LLC advised Constellation.
Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal adviser to Exelon and Kirkland & Ellis LLP is serving as legal counsel to Constellation. The deal is expected to close early in 2012.
