British utility rejects CEG bid

Drax opts for stock sale over Constellation-led buyout for $3.8 billion


Constellation Energy Group Inc.'s bid to export its business model to the United Kingdom suffered a setback this week after shareholders in Europe's largest coal-fired power plant rejected a nearly $4 billion buyout offer.

An investment consortium led by Baltimore-based Constellation held meetings with the owners of Selby, Yorkshire-based Drax Group Ltd. in New York and the United Kingdom over the past week, but the plant's bondholders decided to go ahead with a planned public stock offering after concluding the 2.23 billion-pound ($3.84 billion) bid from the U.S. group was too low. Drax management, which heavily favored a stock sale, said its shares will be offered on the London Stock Exchange beginning Dec. 15.

The deal would have given Constellation a slice of Britain's energy market at a time of rising prices for electricity, gas and coal. Over the past 18 months, Constellation has emerged as a major coal supplier in the United Kingdom and has opened a small sales office to begin trading electricity and gas. The Drax acquisition would have enhanced those efforts, industry analysts said, but the failed bid is unlikely to drastically affect the energy marketer's strategy abroad.

Shares of Constellation Energy rose 79 cents, or 1.5 percent, to close at $53.44 on the New York Stock Exchange yesterday.

From the beginning, the company and its partners - buyout firms Blackstone Group LP and Hellman & Friedman, and hedge fund Perry Capital LLC - faced an uphill battle to convince bondholders that they wouldn't fare better in the stock market. Soaring energy prices in Britain and other parts of Europe have lifted stocks for energy companies, and that raises the possibility of a bigger payday for Drax shareholders once the company's shares begin trading.

In the end, the consortium was unwilling to raise its bid.

"We take a very disciplined approach to these kinds of transactions, and this is really an example of that discipline," Lawrence McDonnell, a Constellation spokesman, said yesterday.

"We formed a very strong bidding consortium and we think our bid reflected a fair price, but we recognized from the start that the public offering was a very reasonable and viable alternative for Drax," he said.

In a press release distributed yesterday in the United Kingdom, Drax management said a "significant majority" of its shareholders were in favor of rejecting the deal, which Constellation first proposed in September.

Analysts familiar with Britain's energy markets said shareholders are gambling that energy prices will remain high indefinitely - something that has proved wrong in the past. Drax and other United Kingdom power providers saw their values plunge when electricity prices fell 40 percent beginning in the late 1990s. Drax was taken over by bondholders after losing its biggest customer and nearly going bankrupt two years ago. It has since recovered, posting a profit in the first nine months of this year as electricity prices have doubled.

"When you have cash on the table of 2.23 billion pounds, perhaps you would be better to take it," said Andrew Moulder, an analyst with Creditsights Inc. in London.

Moulder said there are many variables that could lead to increased volatility in Britain's energy market in coming years, and that could ultimately hurt Drax's value.

The Constellation-led group's decision not to raise its offer may reflect lessons learned by U.S. power companies that bet on Britain's deregulated power market in the 1990s. A handful of companies lost billions of dollars before quitting the market when energy prices fell. Among them was Arlington, Va.-based AES Corp., which bought Drax in 1999 and later had to write off its $3 billion investment.

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