By Paul Adams
December 19, 2005
Though FPL is the acquirer in the stock-for-stock deal, the new company will take Constellation's name. That reflects the merged company's plans to increase revenue by expanding the Baltimore-based merchant energy group, which accounts for three-fourths of Constellation's approximately $12 billion in revenue annually. The boards of both companies approved the deal Friday, the source said.
The combined company would become one of the largest energy producers in the nation. It would trade and sell power to residents, large corporate customers and municipalities from Southeast Florida to Maine and as far west as California.
The source said the company will bill the deal as a merger of equals, with corporate headquarters remaining in both cities "for an extended period."
The deal calls for FPL Chief Executive Lewis Hay III to take the lead as CEO of the combined company. Constellation Chief Executive Mayo A. Shattuck III would take the title of executive chairman. Both men would shuttle between headquarters in each city.
Constellation, the parent company of Baltimore Gas and Electric Co., is the city's only Fortune 500 company and is a major contributor to civic and philanthropic causes throughout the region. The company employs about 9,700 people, with 2,589 of them in Baltimore City and 6,461 in Maryland as a whole. FPL employs about 10,000 companywide.
Spokesmen for Constellation and FPL declined to comment.
The loss of jobs is a typical result when companies merge, but analysts and sources familiar with the deal said FPL is likely joining with Constellation in hopes of tapping into its fast-growing unregulated businesses, which buy, sell and supply power to customers nationwide in markets where prices are not controlled by regulators. That could result in more jobs for Baltimore and a central role for Shattuck as the division expands because of synergies achieved in the merger, industry sources said.
Constellation investors will receive a defined number of FPL shares in the swap, with the price per share at $61 to $62, the source said. Constellation shares closed Friday at $61.62 per share.
However, analysts have valued shares of Constellation from just under $60 to as high as $75, which would put the value of a merger in the range of about $10 billion to more than $13 billion, rather than the approximately $11 billion expected. An $11 billion price tag would correspond with a share price of about $61.80, analysts said.
"I would think it would be terribly disappointing to Constellation shareholders if it turns out to be $61.80," said Paul B. Fremont, a utilities analyst with Jeffries & Co. who has a target price of $75 for the shares but does not own any.
Industry analysts have praised the prospect of a merger between the two companies, saying it would give Constellation the market power it needs to be a contender in an industry that has seen more than $430 billion worth of consolidation deals announced worldwide during the past year. Assuming regulatory approval, the deal would create an industry giant with annual revenue of about $23 billion, making it the third-largest energy provider in the nation by revenue.
As the deal is structured, analysts and energy industry experts predict that Baltimore would emerge as the hub for an even bigger energy-producing and trading powerhouse. The company that traces its roots to the early 1800s as a small Baltimore gas company now receives less than a quarter of its revenue from BGE.
By contrast, FPL receives the majority of its revenue from Florida Power & Light, a traditional utility that serves 4.2 million customers in Southeast and Southern Florida. That utility will retain its name after the merger.
Despite Shattuck's lesser title, industry experts don't envision the Baltimore operations suffering - at least in the short term. There might be some job losses in back-office operations, experts said, but little is expected beyond that.
"I don't see [Hay] having the kind of personality of saying, 'I have to come in and take over everything, be a dictator,' " said Christian H. Poindexter, who was chairman and CEO of Constellation until turning the company over to Shattuck in 2001.
In an interview Friday, Poindexter - who said he had no advance knowledge of his successor's plans to sell the company to FPL - said he knows both executives from his days in the industry and from their golf outings in recent years. He said that, given the personalities of both men, he discounts concerns that the proposed management structure will lead to a power struggle between Shattuck and Hay.
For Wall Street, the biggest concerns will be over price and the potential for the combined companies to increase revenue faster than they could as stand-alone companies.
"At this point, I think it's going to be a great merger if it goes forward," said Michael Worms, an analyst with Harris Nesbitt in New York.
He noted that the combined company will have double the nuclear generating assets, which have become more profitable as the cost of natural gas has soared. The price utilities charge for electricity tends to track the price of natural gas, which reached an all-time high last week and is more than double last year's average. Utilities that produce electricity with coal or nuclear energy have an advantage over those that produce with natural gas.
Fremont, the Jeffries & Co. analyst, said Constellation's stock would likely fall on news of a deal at $11 billion. Investors typically discount utility mergers by about 4 percent. Structuring the deal as a "merger of equals" may also affect the outcome for investors.
"Technically, the term 'merger of equals' just means two companies coming together ... either without a premium or without a significant premium being paid in the acquisition," he said. Fremont's target price of $75 per share would put Constellation's value at closer to $13 billion.
Most Wall Street analysts have indicated they believe that the company is worth more than $61.80 per share.
In a research note written just before news of the merger leaked, Bank of America analyst Shelby Tucker named Constellation his top pick among energy stocks going into 2006. He set a target share price of $66. The only thing that has worried analysts about Constellation's outlook is that its fast-moving, nonregulated power trading and marketing units are difficult to value because of their complexity.
"Constellation is one of our riskiest buys," Tucker said in his note. "Their retail, trading and marketing units are somewhat of a black box, requiring faith in management."
But for FPL, that "black box" is what is driving its merger hopes. The company has been buying nuclear power plants and other generating assets in hopes of building a merchant energy business similar to the one Shattuck built into the national leader.
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