Some investors may not like the price FPL Group Inc. has agreed to pay for Constellation Energy Group Inc., but the companies made sure that a competitor would need very deep pockets to swoop in with a sweeter offer now.

Baltimore-based Constellation has agreed to pay FPL a termination fee of as much as $425 million if it agrees to a takeover proposal from another entity, according to a Securities and Exchange Commission filing this week.

FPL, of Juno Beach, Fla., would have to pay Constellation as much as $650 million if FPL agrees to a takeover by someone else.

The Constellation breakup fee represents 3.7 percent of the $11.5 billion that FPL is offering to pay for the company in stock. FPL's fee is roughly the same share of its own market capitalization.

Three percent is typically the rule of thumb, particularly for such large deals, said Phil Garon, senior lawyer in mergers and acquisitions for Faegre & Benson in Minneapolis. Breakup fees can inch higher in stock-for-stock transactions because shareholders of the acquired company will have a stake in the new entity, he said.

"This is at the higher end, but not off the charts," Garon said of the Constellation-FPL fees.

What is somewhat uncommon, though, is that the breakup fees are mutual. Typically, they apply only to the company being acquired. In those cases, the company would pay the fee, not receive it.

Because the proposed deal is much larger than average, the fees are, too. This year, breakup fees are averaging $46 million for targets and $21 million for buyers, according to FactSet Mergerstat LLC, a provider of mergers and acquisitions information.

Constellation declined to comment. FPL spokesman Steve Stengel noted that FPL CEO Lewis Hay III, promising investors Monday morning that the fee information would be released soon, described them as "fairly standard."

"Our view is that the breakup fee is a common protection in deals such as these, and we think that it is certainly appropriate and in line," Stengel said.

Investors, expecting a pricey premium, drove Constellation's stock up nearly 10 percent after news of an impending deal was leaked last week.

But they reversed course when a lower-than-expected price was announced Monday - the equivalent of $62.02 a share, payable at a fixed ratio of new shares to FPL shares. Constellation's stock dropped $2.52 a share that day, followed by a 22-cent dip yesterday to close at $58.88.

Both chief executives defended the price to analysts this week by calling the deal a "modified merger of equals" that would join complementary assets for better growth.

"It's a fair transaction for both parties," said Mayo A. Shattuck III, Constellation's CEO.

"It's about building a superior position for the long haul," Hay said.

Garon said it's not a true merger of equals because Constellation shareholders would own about 40 percent of the combined company rather than half. But in many straight acquisitions, he added, breakup fees aren't assigned to both parties - only to the company being bought.

When both companies agree to pay breakup fees, they're typically set at the same amount - for instance, $550 million in the $15.4 billion merger that created oil giant ConocoPhillips in 2002 - or at the same share of market capitalization, Garon said.

However they're structured, such fees are typical, attorneys say. Legally, they're not supposed to be set so high that another suitor couldn't possibly step in, but rather to reimburse companies for opportunities lost while tied up in an agreement that went south.

"Think of it as being left at the altar," said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. "There's real cost to being left at the altar."

Still, the fees are often aimed at preventing that from happening at all. "It's really a question of, what's a number that will discourage somebody else from stepping in?" said Harry Chevan, a principal with Gruppo, Levey & Co., a mergers and acquisitions investment bank in New York.

jamie.smith.hopkins@baltsun.com


Correction: When this article was published in the print edition, it noted that merger breakup fees are typically applied only to the company being acquired. It should have explained that, in those cases, the company would pay the fee, not receive it. The Sun regrets the error.