Exelon to buy Constellation in $7.9B deal

AP News
Posted: Apr 28, 2011 6:17 PM
Exelon to buy Constellation in $7.9B deal

Exelon Corp. agreed to buy Constellation Energy Group Inc. for $7.9 billion Thursday, the latest in a string of acquisitions in the electric power industry.

Exelon CEO John Rowe, the longest-serving utility CEO in the country, has long been a proponent of consolidation. He has failed three times since 2003 to acquire a smaller rival. Now the market conditions appear to be on his side.

A combination of lower power prices and rising costs tied to tightening environmental standards has been the catalyst for several recent deals, including Duke Energy Corp.'s $13.7 billion buyout of Progress Energy Inc.

Constellation shareholders will receive 0.93 shares of Exelon for each Constellation share. That's worth $38.59 a share, a 12.5 percent premium over Constellation's closing price on Wednesday.

In Constellation, Exelon would acquire a company much like itself _ with one important difference. Along with a regulated utility and a wholesale power division, Constellation has among the largest retail power divisions in the country.

Analysts say Constellation's large retail arm and Exelon's large wholesale power division could work well together.

"Constellation's retail arm is a good fit, because it tends to do well when wholesale markets are bad," said David Grumhaus, a utility analyst at the Chicago hedge fund Copia Capital.

Wholesale electric providers own generating stations and sell their power to local utilities or retail power providers either through long-term contracts or through regional power pools.

Retail electric providers buy blocks of wholesale power and resell it to industrial, commercial and residential customers. Through most of the last decade, when power prices were rising steadily, retail providers struggled to sign up new customers because they couldn't offer rates lower than what customers were already getting from traditional utilities.

Lower demand for electricity in the wake of the recession and persistently low natural gas prices have lowered power prices and allowed retail providers to advertise low rates in order to attract customers. Also, new devices such as smart meters that track when power is used throughout the day have allowed retail providers to offer new rate plans based on when customers use power in order to lower overall bills.

"It's a deal that makes sense," Grumhaus said.

Constellation CEO Mayo Shattuck said in an interview Thursday that Constellation has spent years building its retail business. This has created a need for more and more power. Shattuck said the original plan was to add generating stations from time to time until its need for power matched its ability to generate power.

"This (deal) allows us to jump to the endgame," Shattuck said.

Closing is expected in early 2012. Exelon shareholders will own about 78 percent of the company and Constellation shareholders the rest.

The companies said they expect the combination will not affect Exelon's adjusted earnings in 2012 and but that it will raise earnings 5 percent in 2013.

The combined company would retain the Exelon name and be based in Chicago. The new Exelon will be the nation's second biggest residential electricity and gas distribution company, serving 6.6 million customers in Maryland, Illinois and Pennsylvania.

This deal will be Rowe's parting shot. If the deal is completed, Rowe would retire. Exelon president Chris Crane, who is credited with rehabilitating the company's nuclear operations, would become CEO of the combined company.

Constellation's Shattuck would become chairman.

Exelon shares rose 69 cents to close at $42.18 Thursday. Constellation shares rose 5.7 percent to $36.26.