CEG to ponder new bid

Constellation Energy Group, which agreed to sell itself to Warren Buffett's MidAmerican Energy Holdings Co. three months ago in the midst of a financial crisis, said yesterday that it will begin talks with its largest shareholder about its unsolicited alternative bid to acquire half of the Baltimore energy company's nuclear business.

Electricite de France, a state-owned utility that owns 9.5 percent of Constellation stock, offered its plan last week as an alternative to MidAmerican's $4.7 billion takeover.

Yesterday's announcement raises more doubt about Constellation's deal with MidAmerican. Just by talking to EDF, Constellation's board is showing it may be willing to pay MidAmerican hundreds of millions of dollars to escape their deal, an analyst said.

"At this stage in the game, it has to be an all or nothing commitment to either pursue [the EDF] deal to the fullest extent or go with MidAmerican," Morningstar analyst Paul Justice said yesterday. "At this point, they've decided that the EDF offer is more appealing of the two."

EDF said it would pay $4.5 billion for 50 percent of Constellation's nuclear power assets, including an immediate down payment of $1 billion in cash. Constellation also would have an option to sell several non-nuclear power plants to EDF for as much as $2 billion, according to the proposal, which values the entire company at $52 a share. That is about twice the value MidAmerican places on Constellation.

The rest of Constellation, including Baltimore Gas and Electric Co. and its coal- and natural-gas power generation business, would continue to operate as a publicly traded, Baltimore-based company. Kelly Sullivan, an EDF spokeswoman, said the company welcomes discussions with Constellation about its competing bid.

Constellation's board of directors rebuffed EDF's earlier $35-a-share offer for the entire company. Yesterday, it said in a statement that its decision to begin immediate discussions with EDF "is consistent with its fiduciary responsibilities to shareholders, as well as its responsibilities under its definitive merger agreement with MidAmerican."

But the board also noted that it has not withdrawn, modified or qualified its recommendation that shareholders vote in favor of the MidAmerican deal.

A shareholder vote is scheduled for Dec. 23. Constellation spokesman Rob Gould declined to comment further yesterday.

Constellation struck its $26.50-per-share deal with MidAmerican in September, when a threat of another downgrade in the company's credit rating triggered a cash shortage that posed a "real risk of immediate bankruptcy," company officials said in documents filed recently with the Securities and Exchange Commission.

Because Constellation's commodities-trading business is required to post collateral to operate, further downgrades would have required Constellation to put up more cash than it could raise. The financial sector meltdown also increased pressure on Constellation's liquidity access.

Constellation officials said it choose MidAmerican's bid because it offered a more solid financing guarantee and easier regulatory approval.

In submitting its latest proposal, EDF said MidAmerican's offer undervalues Constellation and its future opportunities.

Some analysts were surprised that EDF entered the picture again after announcing in October that it would not submit a new bid, noting difficult credit markets.

But Justice, the Morningstar analyst, noted in a previous research note that $52 per share would be the minimum value for Constellation's management to consider the consequences of walking away from MidAmerican's offer.

And other analysts say Constellation provides a huge U.S. footprint for EDF, which has a joint venture with Constellation to develop new nuclear projects. EDF agreed in September to buy British Energy for $18.7 billion to expand its nuclear operations outside of France.

"This is one of only a few markets globally that will build on a huge scale," Ingo Becker, an analyst at Landsbanki Kepler in Frankfurt, told Bloomberg News yesterday. EDF has "a strategy of expanding globally on new nuclear build. No one else is such a powerful global operator. The U.S. option right now is Constellation. They are serious in that."

The agreement with MidAmerican prohibits Constellation from seeking other bids, but it allows the company to consider an unsolicited offer if the board deems it a "superior proposal."

If Constellation's board withdraws or modifies its recommendation because not doing so would breach its fiduciary duties, Constellation would have to notify MidAmerican, which would then have five business days to revise its offer. Regardless of the recommendation, Constellation is contractually obligated to submit the original deal to a shareholder vote.

EDF is asking for a waiver of its restriction against voting in opposition to Constellation's board of directors, a limitation it agreed to when the company invested in Constellation last year.

MidAmerican spokesman Mark Reinders said yesterday that the company is not commenting on EDF's proposal or discussions between Constellation and EDF.

But MidAmerican Chairman David Sokol told Bloomberg News last week that the company has no intention of revising its bid, noting that the two companies have a signed merger agreement.

Even if MidAmerican doesn't complete the merger with Constellation, it would walk away with a $175 million termination fee. MidAmerican also would get a 9.9 percent stake in the company and $418 million in cash for stock that cannot be issued because of regulatory limits. Constellation also would have to repay MidAmerican's $1 billion investment, plus 14 percent interest, on Dec. 31, 2009.

Yesterday, CEG shares gained $1.05, or 3.87 percent, to close at $28.15.

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