Surprise buyout in credit crunch

18 September 2008

A deal was 'tentatively' struck yesterday which would see Constellation Energy taken over by MidAmerican Energy Holdings.

 

Constellation's share value had slipped dramatically from $58.37 at the close of trading on 12 September to $24.77 at the end of 17 September - halving in just three days' trading and even bumping as low as $14.82 along the way. The price slip has been put down to liquidity concerns centred on Constellation's energy trading division, which is the largest in the USA.

 

This was seen as a buying opportunity by MidAmerican Energy Holdings, over 80% owned by Berkshire Hathaway, which itself is chaired by billionaire Warren Buffet. MidAmerican will pay $26.50 per Constellation share, valuing the business at $4.7 billion. Additionally, Constellation will issue $1 billion of preferred equity yeilding 8% to MidAmerican. Analysts said this 'infusion' of cash would be enough to stabilize Constellation and eliminate the credit worries that currently surround it.

 

The 'tentative' deal was unanimously approved by the boards of both companies but is subject to due diligence, shareholder, federal, state and local regulatory approval. The companies said a finalised deal was expected to be announced later today.

 

Constellation describes itself as a major generator of electricity in the USA, owning 83 electricity generating plants across the country, with a combined generating capacity of some 9000 MWe. More than 60% of its generating output is from nuclear power plants - its nuclear generation division operates five reactors at three sites (Nine Mile Point and R E Ginna in New York; and Calvert Cliffs in Maryland).

 

Nuclear plans remain

 

With Electricité de France (EdF), Constellation had formed the UniStar initiative to deploy Areva EPR reactors in North America. EdF recently increased its stake in Constellation to 9.51%, sparking rumours that it would launch a takeover bid - in addition to its expected purchase of British Energy.

 

Company statements descibing the takeover situation said that "MidAmerican is comfortable with, and committed to, Constellation Energy's current strategic plan ... Constellation's premier fleet of nuclear assets, and its UniStar joint venture with EdF complements MidAmerican's ongoing commitment to environmental initiatives, including investments in hydro, wind and geothermal energy."

 

UniStar has submitted combined consutruction and operating licence applications for new EPR units at Calvert Cliffs and Nine Mile Point, while Areva has already ordered major components for these. Another UniStar application is expected regarding Bell Bend, Pennsylvania late this year.

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