Biggest winner in Constellation deal is Buffett

"Warren Buffett loses out to the French" was the gist of several headlines yesterday on Electricite de France's deal to invest $4.5 billion in Constellation Energy Group.

Constellation's board spurned Buffett's competing offer and blocked his plans to merge the Baltimore-based energy seller into another power company based in Iowa.

But Buffett rarely loses, and he didn't lose here. At a time when no investor is making profits on anything, his investment in Constellation more than doubled his money in a few months.

In fact, the sainted Sage of Omaha emerges from this disaster as the biggest winner.

It's not the French. EDF is happy to make a huge investment in U.S. nuclear power via the Baltimore outfit. But it's paying a pretty price.

And it's not Constellation shareholders. Many of them hated the Buffett offer, which seemed like a lowball deal. Some were thrilled at yesterday's developments, which leave Constellation as an independent corporation based in Baltimore.

But when they wake up and figure out what has happened since August, they might not feel so giddy. Constellation's near-death experience leaves it and its owners far poorer.

Buffett put Constellation in a headlock in mid-September as financial markets crashed. Heavy borrowing for commodity bets left Constellation ill-equipped to survive. A $1 billion Buffett bailout check saved Constellation from the worst, but he exacted a price: Sell him the entire company for $26.50 a share. Or pay an emperor's ransom.

The Brink's trucks are plotting the route from Pratt Street to Omaha even as you read this.

Constellation has to deliver a $175 million "termination" fee. Plus $418 million in cash. Plus Constellation stock worth about $460 million. So that's $1.05billion for less than four months' work - an annual rate of return above 300 percent.

Oh, yeah - he also gets back his original $1 billion investment. It has been earning 8 percent since mid-September - an additional $20 million. Now Constellation has to pay 14 percent until it can afford to fork over the money.

Instead, Buffett could have taken his dough and copied every other investor on the planet by buying Treasury notes at 1 percent. Did he choose wisely?

Constellation shareholders would have been thrilled with 1 percent. Their stock began 2008 at $100 and closed yesterday at $23.

It's true that energy vendors of all stripes have seen their shares plummet. But Constellation, owner of Baltimore Gas and Electric, got an extra push downhill from its own management.

To an extent not fully apparent until recently, Constellation realized big profits by speculating on commodities with borrowed money instead of sticking to its core business of making and selling electricity and reselling natural gas. That couldn't and didn't last forever.

First it misreported key aspects of its trading exposure. Then the financial meltdown put all heavily borrowed companies at risk.

The post-Buffett Constellation is a very different company. It must pay Omaha all that stock and money, of course, which come right out of shareholders' hide.

Constellation's trading business is doubly gone - first because the credit crunch means nobody can do it anymore, second because the company is trying to convince people it's going to Gamblers Anonymous.

Constellation is "winding down speculative activities," its new chief financial officer, Jonathan W. Thayer, told investors yesterday. It's on "a responsible financial path," he said. "We've learned a great deal in the last four months, and we're determined not to repeat the experience."

Nobody asked what kind of path Constellation was on before. What's the opposite of "responsible"?

The company still isn't out of the rough. EDF seems to have extended enough immediate help to keep the wolf away. But analysts peppered Thayer and CEO Mayo A. Shattuck III yesterday with questions about cash and collateral.

Shattuck gave profit projections for next year that were as much as a third lower than what Constellation earned in 2007. The company announced a planned dividend cut of at least half. (It'll use the extra cash to pay off debt.) Moody's downgraded Constellation's credit yesterday, although other raters didn't.

Constellation shares, which had risen to nearly $29 on word that the Buffett offer was in trouble, fell to $23 yesterday as investors reassessed.

That seems about right. The recession will hurt all companies. Lower energy prices might harm Constellation's electricity and gas markup. Building nuclear plants with EDF will take years or decades to bear fruit. There are big regulatory bumps before the EDF deal is approved.

And the management that nearly ran Constellation into bankruptcy proceedings is still in charge.

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