Constellation is likely to go it alone for now

Heavy fee would be imposed if company sells itself

Corporate future

Merger Unplugged

October 26, 2006|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN REPORTER

Constellation Energy Group Inc. is unlikely to rush to find another acquirer in the wake of its failed deal with a Florida energy company, and it might eventually look to buy rather than sell, industry experts said yesterday.

If nothing else, Baltimore-based Constellation has a financial incentive to sit tight for a while. It would have to pay a multimillion-dollar fee to FPL Group Inc., which had originally agreed to buy the company, if in the next year it negotiates to sell itself or give a third party at least 35 percent of its net revenues, income or assets.

But regulatory issues loom larger than fees.

Experts say that acquirers would likely shy away until it's clear whether the current Maryland Public Service Commission members have the power to approve any deal that includes Constellation's regulated utility, Baltimore Gas and Electric Co. A court ruling last month prevented PSC members from taking final action on the Constellation deal, one of the factors in its demise.

"I think that the situation will resolve itself, one way or another, in the near term," said Stephen L. Teichler, an attorney who practices utility law for Duane Morris LLP in Washington. "You can't go on forever with your regulatory commission in legal limbo."

FPL had sued to get clarification, but yesterday it said it will ask that the complaint be dismissed.

Stocks steady

Investors don't seem terribly worried by the deal's collapse or prospects for the company's future. Constellation's share price closed at $62.37 yesterday, down 19 cents. And the previous day's close was the high for the year.

No one who was paying attention could claim to be blindsided by the news. Both Constellation and FPL had warned before yesterday's announcement that delays and uncertainties in Maryland threatened the merger.

The merger - and the unrelated announcement this year that BGE customers would face a 72 percent increase in their electricity bills - was turned into political hay in this election year. But Teichler doubts that Constellation, which gets the bulk of its revenue from its merchant energy business, selling energy nationwide to big users, will be forever seen as a poor acquisition candidate as a result. He sees "a great deal of restiveness" in some other states about utility mergers and utility price increases.

Daniele Seitz, an analyst at Dahlman Rose & Co., thinks that's why Constellation might look to acquire rather than be acquired - not other companies, but power plants. The upside: fewer regulatory headaches.

"Most companies that have been burned by ... unsuccessful negotiations tend to stay away from that for a while," said Seitz, who doesn't own any Constellation shares. "I would say that maybe the company would be more likely to look toward additional capacity or an expansion into another commodity field."

Congress' repeal of the Public Utility Holding Company Act of 1935, which went into effect in February, reduced the barriers to mergers between noncontiguous utility owners such as Constellation and FPL. Expectations were high for speedy consolidations. But state regulators - and politicians - have proven a bigger hurdle than companies expected.

Last month, Exelon Corp. bowed out of plans to buy Public Service Enterprise Group Inc. because of opposition from New Jersey utility regulators.

The failure of two large utility mergers "is a sign that they're not as easy as everybody was getting excited about," said Robert Burns, a senior research specialist at the National Regulatory Research Institute at Ohio State University.

Neither Constellation nor FPL will pay a termination fee to end the deal. But Constellation must pay FPL $425 million if it sells itself - or control of at least 35 percent of itself - to another party before July 1 and $210 million if it does so between July 1 and Sept. 30, according to a filing with the Securities and Exchange Commission yesterday.

"That's really not a very long time," said Ken Rose, an independent industry consultant based in Columbus, Ohio. "I don't see how that would matter much. There's no rush to do anything right now."

Fate of BGE

One exception to the multimillion-dollar fine: Constellation can spin off or sell BGE. Constellation in fact once planned to break into two companies - BGE and a merchant power seller - but called off the split in 2001, blaming recession and a tricky energy market.

Don't assume the company will try again, said Paul Fremont, an analyst with Jefferies & Co.

"When you break yourself into two parts, that is by definition a tax-free transaction, a spinoff. ... Because the government doesn't want you to use the spinoff in order to avoid taxes that would normally be associated with a sale, I think there's a restriction on the ability of that spun-off entity to be acquired," he said. "That to me would be a limitation on sort of the benefit of breaking yourself up into pieces."

Yesterday, Mayo A. Shattuck III, Constellation chief executive, said the company is not contemplating a breakup.

But Seitz thinks merchant power companies such as Constellation might eventually want to spin off their regulated utilities - the retail end of the business - to focus on their wholesale efforts. Merchant energy accounted for more than 80 percent of Constellation's revenues last year, compared with 16 percent in 2001.

"They're in a very good position, competitively," Rose said. "They can take their time to assess where they want to be. Maybe they're not happy about the way things turned out, but I think when they think about it, they're going to realize they're really not in that bad a position."

Sun reporter Paul Adams contributed to this article.

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