Constellation offer: pot of gold or elusive rainbow?

December 04, 2008|By JAY HANCOCK | JAY HANCOCK,

Like the Wizard of Oz, Electricite de France looked into the souls of everybody connected with Constellation Energy Group and offered to grant their greatest desires.

To shareholders, it promised a higher stock price.

To Constellation boss Mayo Shattuck, it held out the prospect of continued employment and undoing a great failure.

For Maryland politicians, it would keep Constellation headquarters in Baltimore.

For creditors and rating agencies, it promised cash to prevent a Constellation bankruptcy even if shareholders reject Warren Buffett's buyout.

To Constellation's board, which approved hundreds of job cuts disclosed yesterday, it promised a heart.

Wait - scratch that. Even wizards can't do everything.

Now everybody must decide whether the promises are fantasy or reality.

Shareholders, in particular, need to weigh EDF's offer of $4.5 billion for half of Constellation's nuclear-generation business against Buffett's solid but far lower price of $4.7 billion for the whole company. They vote Dec. 23 on the bid from Buffett's MidAmerican Energy Holdings.

With a 10 percent stake, EDF is Constellation's largest shareholder and partner in the development of future nuclear plants. The state-owned French power company has been making noise about buying all or part of Constellation since September, when a cash crunch, too much borrowing and a possible downgrade threatened Baltimore's biggest corporate headquarters and CEO Shattuck with bankruptcy.

Both EDF and Buffett offered to rescue Constellation with a cash infusion to be followed up with further investment. But Buffett moved more quickly and struck a deal at $26.50 per share even though EDF was talking about $35.

Because $26.50 is far below the $107 that Constellation sold for not long ago, many shareholders were hoping EDF would try to wreck Buffett's deal by outbidding him. Yesterday's offer was its latest attempt.

By valuing just Constellation's nuclear business at $9 billion - almost twice what Buffett has offered for the whole company, including Baltimore Gas & Electric and numerous other power plants - EDF has made a fairly breathtaking statement. To drive the point home, it has placed a value on all Constellation's assets of $52 a share.

But for shareholders, this may be irrelevant.

EDF isn't offering $52 to anybody. That appraisal is for propaganda purposes only. Shareholders wouldn't even get the $4.5 billion. That would go into Constellation's till. The stock would continue trading as it does now. There are big regulatory barriers.

Dodgiest of all, EDF is vague about where it will get the money.

The company said it will finance the deal "through corporate funds and credit facilities." We've heard that before. Frozen credit markets are killing deals all over the planet. Plus, EDF is in the process of swallowing British Energy for $18 billion, which could crimp its ability to raise money for another purchase.

Constellation stock popped above $27 yesterday for the first time since early October, which suggests investors see some upside to the French connection.

The ball is in Buffett's court. If he thinks the EDF offer is real, he might increase his bid. On the other hand, almost alone on the planet, he really does have cash to do a deal. He might sit tight and dare shareholders to reject him.

All energy stocks have plunged with the market since a desperate Constellation agreed to Buffett's offer in mid-September. So on a relative basis, it doesn't look as cheap as it once did.

BGE customers are one constituency that doesn't seem to gain advantage from EDF's proposal. To get the deal done, the company claims it can bypass Maryland's Public Service Commission, which usually tries to squeeze utility-customer rebates out of these situations.

But by keeping Constellation owned by present shareholders, by maintaining its longtime Baltimore headquarters, by promising to infuse new cash, EDF has offered an attractive deal to Baltimore.

The idea is that EDF's contribution would keep an independent Constellation solvent, and eventually its stock would rise back to pre-crisis levels. Many shareholders see that as possible, even with the 20 percent ownership stake that Buffett gets for free if they reject his offer.

Unfortunately, Baltimore doesn't decide on this. Shareholders do. Now they have to figure out whether the Wizard of Paris is real or pulling levers behind a curtain.

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