NEW YORK (Reuters) - Constellation Energy Group Inc agreed to sell itself to a unit of Warren Buffett’s Berkshire Hathaway Inc for about $4.7 billion in cash on Thursday after investor fears about its liquidity cut its value by nearly 60 percent.
The deal with Berkshire’s MidAmerican came together quickly amid a tumultuous three days for Constellation, which put itself on the block as those fears drove its shares down sharply.
“The reality is that it all came together in the last 48 hours,” MidAmerican Chief Executive Gregory Abel said in an interview.
“Pretty much from the time we started the dialogue, we’ve been working to see if there’s a balanced outcome we can deliver for all the various stakeholders,” he said.
Under the tentative deal, Constellation will get a cash infusion of $1 billion in exchange for preferred equity yielding 8 percent upon the signing of a definitive agreement expected by the end business Friday.
MidAmerican said it would pay $26.50 a share for Constellation, a small percentage premium over Wednesday’s closing stock price. But it is less than half of the company’s market capitalization on Friday and far below its lifetime high of $107.97 in January.
“It’s clearly a full and fair value when you look at the underlying market conditions, including the risk we’re taking in this kind of market,” Abel said.
He said that Constellation’s management has given MidAmerican every assurance that there were no underlying issues that would be uncovered in due diligence and that the business was sound.
Constellation’s abrupt fall from grace shows the credit crisis that has shaken the markets and transformed the U.S. financial sector is starting to rattle other industries as well such as the energy sector.
“Their backs were against the wall,” said Philip Adams, senior investment-grade analyst at Gimme Credit, an independent research service.
Credit rating agency Standard & Poor’s warned on Wednesday that Constellation faced an “acute crisis of confidence” and that without a cash infusion, it might cut its “BBB” ratings on the company’s debt, a move the company would not likely withstand.
On Thursday S&P said it was keeping the company on “CreditWatch with developing implications,” noting that the deal will require shareholder and regulatory approval. The companies expect the deal to close within nine months.
Shares in Constellation were up 1.41 percent to $25.12 on the New York Stock Exchange in afternoon trade, still holding below the MidAmerican offer level.
Under the proposed deal, MidAmerican, will add Constellation’s 9,000 megawatts of power generation, including its three nuclear power plants, and utility Baltimore Gas and Electric to its current stable of utilities in the Midwest, Pacific Northwest, Rocky Mountains, and United Kingdom and its natural gas assets.
The three nuclear plants — Maryland’s Calvert Cliffs, New York’s Nine Mile Point and R.E. Ginna — alone are probably worth the takeover price, company analysts said.
Abel said MidAmerican plans to generally follow the business plan Constellation has in place for those assets. He said the trading business would probably shrink.
“We would not be using Constellation Energy’s balance sheet or our balance sheet to the same extent. You’re likely to see some downsizing in that area or at least the risk associated with that managed in a different way,” he said.
Analysts also expected Buffett’s reputation as a long-term holder of assets would help win over skeptical Maryland regulators, whose concerns scuttled a proposed takeover by Florida’s FPL Group for about $62 per share.
The purchase furthers Buffett’s efforts at whittling down Berkshire’s cash stake, which by June 30 had fallen to $31.16 billion from $44.33 billion at year end.
Earlier this year, Berkshire paid Chicago’s Pritzker family $4.5 billion for 60 percent of Marmon Holdings Inc, which makes railroad tank cars, pipes, fasteners, wiring and other products.
Berkshire also committed $6.5 billion to help Mars Inc buy chewing gum maker Wm Wrigley Jr Co and agreed to invest $3 billion as part of Dow Chemical Co’s purchase of specialty chemicals maker Rohm and Haas Co.
Buffett has transformed Berkshire since 1965 from a failing textile maker into a roughly $194 billion conglomerate with at least 76 companies. He favors businesses with strong earnings and management, and also invests in stocks.
Utilities and energy contribute about 10 percent to Berkshire’s overall results. Insurance contributes about half.
The cost to insure Constellation’s debt with credit default swaps dropped 53 percent to 243 basis points, or $243,000 per year for five years to insure $10 million in debt, according to Markit Intraday. The swaps had surged as high as 800 basis points on Wednesday.
Additional reporting by Karen Brettell and Jonathan Stempel; Editing by Steve Orlofsky, Lisa Von Ahn, Leslie Gevirtz