Exelon to buy Constellation Energy for $7.9 billion
NEW YORK (Reuters) - Power company Exelon Corp (EXC.N) struck a deal to buy rival Constellation Energy Group CEG.N for $7.9 billion in stock in a bid to become the largest generator of competitively priced electricity in the United States.
It would be the latest in a string of deals in the fragmented U.S. utility industry, like Duke Energy's (DUK.N) $13.7 billion bid for Progress Energy (PGN.N) and AES Corp's (AES.N) $3.5 billion deal for DPL Inc DPL.N. Utilities face new costs to upgrade power grids and meet environmental controls, which has spurred the deal activity..
Unlike most of those deals, where utilities have looked for regulated businesses to shore up their operations in the face of weak power prices, Exelon is picking up a business with significant unregulated operations.
Exelon CEO John Rowe said on a conference call that he believes investors were concerned that the company "would try to buy an all-regulated company to diversify that risk."
"You made it clear that you were buying Exelon for its long run upside, and this deal preserves that long term upside," Rowe said, addressing his company's investors.
The deal is Rowe's latest -- and likely last -- attempt to transform his company through acquisitions. Exelon was thwarted in efforts to buy independent power producer NRG Energy Inc (NRG.N) in 2009, Public Service Enterprise Group (PEG.N) in 2006, and Illinois Power in 2003.
The combined company will keep the Exelon name and its headquarters in Chicago. Rowe plans to retire after the deal closes, and Exelon Chief Operating Officer Christopher Crane will become the new company's CEO. Constellation CEO Mayo Shattuck will become executive chairman.
Exelon, among the leading U.S. utilities and already the nation's top nuclear power company, said the combined company will own more than 34 gigawatts of power generation. The company's fleet would be roughly 55 percent nuclear, 24 percent natural gas, 8 percent renewable and hydro, 7 percent oil and 6 percent coal.
Exelon will add the 1.2 million electric customers Constellation serves through its BGE utility in Maryland to its existing 5.4 million customers in its own electric utility businesses.
"What the company has done is cloned itself on a larger scale -- I don't think it's materially changed its profile. It's still going to be overwhelmingly nuclear, it's still going to be a regulated-unregulated mix," said Bernstein analyst Hugh Wynne.
"What Exelon seems to be saying is we're happy with our profile, we're not seeking to transform it and we're looking for another company that allows us to get larger and achieve some synergies, but not necessarily achieve some sort of transformation."
Exelon said the deal is expected to increase its 2013 earnings by more than 5 percent.
Constellation shares were up 5.5 percent to $36.19 in afternoon trading, while Exelon shares were up 66 cents, or 1.6 percent, at $42.15.
Constellation shareholders will receive 0.93 Exelon share for each Constellation share, the companies said in a statement.
The offer values Constellation at $38.59 a share -- 12.5 percent above its Wednesday closing price of $34.30.
The companies expect the deal to close early in 2012. But utility deals in the United States are usually drawn-out procedures that face tough scrutiny from states and regulators.
The Exelon-Constellation deal must be approved by shareholders of both companies, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, state regulators in Maryland, New York and Texas, and other regulatory bodies.
Indeed, Constellation has faced challenges in closing its own deals in the past. Florida power company FPL Group Inc scrapped a $12.5 billion takeover of Constellation in 2006 after the merger became embroiled in Maryland state politics.
The companies have offered to give BGE customers $110 million in rate credits, invest more than $50 million to develop 25 megawatts of renewable energy in the state, spend $10 million to develop electric vehicle infrastructure there, and provide other benefits.
Still, analysts said the state could still be a hurdle.
"For several years, Maryland has demonstrated a higher-than-average level of regulatory and political complexity than most other states. We will see higher level of scrutiny," said Paul Patterson, an analyst at Glenrock Associates.
The companies also said they plan to sell three Constellation power plants in Maryland with a total of 2,648 megawatts of generating capacity.
Constellation owns its nuclear assets in a joint venture with France's EDF (EDF.PA).
The French utility also owns more than 7 percent of the company's shares and said in a statement that it is evaluating the deal and its options. Lazard is representing EDF with respect to its options on the deal.
Barclays Capital, J.P. Morgan Securities, Evercore Partners and Loop Capital Markets were financial advisers to Exelon.
Morgan Stanley, Goldman Sachs and Credit Suisse advised Constellation.