Stock price may push Shattuck to sell Constellation to Exelon

March 14, 2011|By Jay Hancock

Few things inspire financial journalists, stock analysts and investment bankers like rumors about corporate mergers and acquisitions.

M&A action creates drama for the writers, bonuses for prescient analysts and huge fees for the bankers. So perhaps it's no shock that since December there has been background buzz about a possible takeover of Baltimore-based Constellation Energy Group by Chicago-based Exelon Corp.

Energy shares are making a comeback. Constellation stock is missing the party. And it has been ages — what, four months? — since we in the media raised the blood pressure of the Constellation public relations folks.

Somebody tipped me off in January (anonymously, of course, and with no evidence) that Constellation was takeover bait. Merger talk is "felt to be at a fevered pitch," Credit Suisse analysts reported at their own energy conference last month. Constellation and Exelon are among those "most commonly discussed as looking to do a deal," they said.

On Monday, Crain's Chicago Business published an article with this headline: "Constellation looks like a nice match for Exelon."

The rumor train has left the station and rounded the bend. But in this case, there are reasons to pay attention beyond the same old story of chief executive egos, companies' "strategic fit" and journalists' imaginations.

To put it plainly: I don't see how Constellation boss Mayo Shattuck can raise the company's stock price without selling it.

October will mark his 10th anniversary as Constellation's chief executive. He took the helm as CEO at the company, parent of Baltimore Gas and Electric, in the chaos after the terrorist attacks of 2001. Formerly an investment banker with Deutsche Banc Alex. Brown, Shattuck was supposed to guide Constellation through energy deregulation and post-9/11 uncertainty.

But Constellation stock has delivered mediocre returns during his tenure, thanks partly to a zigzagging strategy and bets that didn't pan out. Constellation closed at $23.41 the day Shattuck's appointment as CEO was announced in 2001. Monday it closed at $32.16.

Including dividends, the shares generated average annual returns of 6.7 percent during the period — less than what you could have made by buying a mutual fund based on the Philadelphia Stock Exchange Utility Index.

To justify all those millions shareholders have been paying him, Shattuck needs to do better than $32.16. From his point of view, the best way — especially now that Plan A (become an energy-trading powerhouse like Enron, only without the fraud) and Plan B (lead an American nuclear-energy renaissance) have failed — may be to return to his roots as an investment banker and do a deal.

Of course, that won't be easy, either, as Shattuck's previous attempt to sell the company demonstrated. (OK, maybe his true Plan A all along was selling off Constellation.) In 2006, FPL Group and Constellation abandoned merger plans after running into resistance from Maryland's Public Service Commission.

The PSC is a perennial deal obstacle, having effectively blocked a combination of BGE and Pepco in the 1990s and delayed the consummation of a more recent strategic transaction involving Constellation and France's EDF Group.

But for shareholders, the logic of an Exelon-Constellation combo is hard to deny. There are the usual "synergies" from combining administrative operations.

The combined company's nuclear fleets would give Exelon an even firmer hold as the country's No. 1 nuclear energy producer. A merger would yield greater market power in an already flawed and concentrated wholesale power bazaar. President Barack Obama's electricity-friendly regulators would be unlikely to object.

Exelon boss John Rowe is widely reported to want to do a deal. And, of course Shattuck, would reap a bonanza in severance pay or maybe even succeed Rowe as top dog. Shattuck "isn't viewed on Wall Street as an impediment to a sale," is how Crain's coyly puts it.

"We don't comment on market rumor and speculation," said Constellation spokesman Lawrence McDonnell. I didn't hear back from Exelon, but the company declined to comment to Crain's about possibly buying Constellation.

Shattuck's newest growth strategy, reselling power to retail customers in many states, will need luck, execution and patience. Cheap natural gas from shale formations, despite environmental concerns, should keep electricity relatively cheap for a long time. (Natural gas powers many generators and helps set the price for megawatts.)

Wouldn't it be easier to peddle Constellation to Exelon? Last month, FirstEnergy Corp. agreed to buy Allegheny Energy, owner of Potomac Edison, which serves Western Maryland, for $4.7 billion.


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