December 17, 2008
Warren Buffett's bid for Constellation Energy could be uprooted. Electricite de France, which had also been interested in the Baltimore-based utility, is offering a lucrative price for half of the company's nuclear assets.
It's an interesting play by the European conglomerate that is the world's biggest nuclear energy owner with 58 such plants in its portfolio. While the race is on to officially acquire attractive utility assets at good prices, only those enterprises that are flush with cash and have outstanding credit ratings will participate.
Constellation says in a prepared statement that "the decision to begin discussions with EDF was made following consultation with its legal and financial advisors, and in a manner consistent with its fiduciary responsibilities to shareholders...Constellation Energy's Board of Directors has not withdrawn, modified or qualified its recommendation that shareholders of Constellation Energy vote in favor of the merger with MidAmerican."
Constellation's board and shareholders will have a lot to think about before their scheduled Dec. 23 vote on whether to approve Buffett's MidAmerican offer. MidAmerican made a $4.5 billion bid for the entire company last September at a time when Constellation's share prices were falling precipitously because of an imminent credit downgrade. The deal, which was struck in an unprecedented two days, allows Constellation to back out by early 2009 -- but at a high price.
Now Constellation must weigh its options. On the one hand, it would have to issue almost 10 percent of its outstanding stock to MidAmerican and pay the utility about $593 million in cash. And on the other, EDF would pay the company $4.5 billion for half of its nuclear portfolio. That's about $52 a share compared to Buffett's offer of $26.50 a share. Neither Buffett nor EDF said that they will engage in a bidding war. EDF adds that if its foray for Constellation is unsuccessful, it would seek to buy other U.S.! nuclear assets.
EDF already owns 9.5 percent of Constellation. The two are also involved in a joint venture that is called UniStar. That enterprise seeks to build nuclear facilities in the United States, which would be on top of the five nuclear reactors that Constellation now owns and which generate about 4 percent of the nation's nuclear production.
Part of the French-based company's business plan is to expand its footprint not just into the United States but elsewhere around the globe where it sees potential for the growth of nuclear power. This includes China, South Africa and Great Britain, where it is now trying to win regulatory approval for its $18 billion bid for nuclear giant British Energy. EDF, which is 85 percent state-owned, sees potential abroad as evidenced by the fact that it has earned 34 percent of its gross operating profit outside France last year.
Industry Gem
Constellation, which had been an industry gem with $21 billion in sale! s last year, was pushed to the verge of bankruptcy in the fall because it had underestimated the collateral it would need if its credit ratings were downgraded. Essentially, the crisis underlying the financial sector had severely affected its ability to fund its trading operations.
Altogether, it had lost as much 70 percent of its value since that emergency had peaked in July. It subsequently revealed that its collateral obligations more than doubled from July to August, to about $4.4 billion. It then sought in September to sell off certain assets in a last-ditch effort to raise capital. Warren Buffett entered and boxed out EDF, which said that it simply could not make a binding offer in such a short time frame.
Buffet's Berkshire Hathaway, which owns MidAmerican, reports more than $31 billion in cash. It seeks distressed assets, particularly at a time when there are so few suitors that can cut checks. Buffett, meanwhile, has said on multiple occasions that utilities are among the properties he would like to add to his investment lineu! p.
Even though Buffett rode up on a white horse, Constellation would be remiss to ignore EDF's advances. While the dollar amount proposed by EDF sounds inviting, the company's board will look at the fine print to determine the full value of its offer.
Perhaps there is a middle ground. According to James Halloran, Wall Street analyst for National City Bank in Cleveland, Buffett sees an opportunity to cash in on Constellation's non-nuclear power assets that include about 9,000 megawatts of generation. With the country projected to be short generation in the decades to come, these facilities will likely become increasingly rewarding.
That contrasts with EDF's primary focus, which is on the nuclear units. Indeed, it may work out a deal to buy half of the nuclear assets. Such an investment could be rewarding. Not only could it optimize the existing plants but it would benefit greatly from a nuclear resurgence both here and abroad.
"EDF, first and foremost, wants ! a clean purchase to get MidAmerican out," says Halloran. "EDF would co me in with enough money to secure the deal. But EDF may have a contingency plan to buy half the nuclear assets from Buffett. That would be a good deal because his net investment in the thing would be extremely minimal. And each side would get much of what it wants."
Such an acquisition is not risk free and would likely dilute the financials of both companies. Their goals, though, are similar in that they each want to get in on the ground floor of a possible generation boom in this country. Their stockholders would naturally benefit as the value of the base-load power generation assets are maximized.
Constellation is clearly a prized asset. And the bidding is still underway. Shareholders will let their voices be heard but in the end, it may be that each potential acquirer gets some of what it wants. And while others may have an interest in the distressed utility, only those with the resources and standing are able to make their intentions known.
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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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