Constellation to lay off more than 800 workers

The Baltimore Sun

Constellation Energy Group Inc. will lay off as much as 8 percent of its work force, or more than 800 people, mostly from the commodities trading division that propelled the company to the brink of bankruptcy this year and forced it into a proposed takeover, company officials said yesterday.

About half the job cuts will be in the Baltimore area.

In a memo to employees, Constellation Chief Executive Officer Mayo A. Shattuck blamed deteriorating financial markets and "the near certainty of a prolonged and deep economic recession" for making the cuts necessary.

"We have and will continue to take aggressive action to conserve cash and reduce discretionary spending," Shattuck wrote in the memo, a copy of which was obtained by The Baltimore Sun. "Unfortunately, our unique financial circumstances, and eroding global market conditions, require that we go further and reduce the overall size of our company."

The move came as the fate of Constellation's proposed $4.7 billion takeover by MidAmerican Energy Holdings Co. was cast into question by the company's largest shareholder.

Electricite de France, a European firm that owns almost 10 percent of Constellation's stock, announced its desire to vote against the shotgun deal and offered an alternative plan placing the company's value closer to $10.4 billion.

The French company said in regulatory filings that the MidAmerican merger would "significantly undervalue" the company if allowed to proceed.

"We are not alone in this belief," EDF officials said in a letter to Constellation's board of directors. "Stockholders, ratepayers, regulatory authorities, legislators and analysts have all been outspoken in their view that the MidAmerican transaction was accepted under extraordinary circumstances and is contrary to the best interests of the Company and its constituents."

Shattuck said in his memo that the layoffs are unrelated to the takeover plan.

Some employees will lose their jobs "in the near term" while other job cuts will come through 2009, the memo said.

A company spokesman said the cuts are part of a corporate restructuring unveiled in August and some job losses might be achieved through attrition or by divesting some operations.

"I deeply regret this action but it's a necessary and responsible step we must take," Shattuck wrote. "I assure you this decision was the result of thoughtful deliberations and was taken only after many other cost-cutting options were considered and implemented."

Constellation struck its $26.50-per-share deal with MidAmerican in September, when a 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 with the Securities and Exchange Commission.

EDF offered to buy the company then for $35 a share, but Constellation officials said the offer from MidAmerican, a subsidiary of billionaire Warren Buffett's Berkshire Hathaway Inc., offered a more solid financing guarantee and easier regulatory approval.

The agreement with MidAmerican prohibits Constellation from seeking other bids, but it allows the company to consider an unsolicited offer, such as the latest proposal from EDF, if the board deems it a "superior proposal." Constellation would have to notify MidAmerican, which would then have five days to revise its offer.

MidAmerican Chairman David Sokol told Bloomberg News in New York yesterday that "we believe the merger agreement is in the best interest of stakeholders. We have a signed merger agreement. We have no intention to alter our bid."

Constellation declined to comment on the EDF offer yesterday.

But analysts said the latest proposal adds a new dimension to Constellation's fate that will likely play out during the coming weeks. The MidAmerican proposal is scheduled for a shareholder vote Dec. 23.

"Clearly the valuation proposal is better, but what investors have to get comfortable with is the question, 'Do they really mean it this time?' " said Morningstar analyst Paul Justice, noting that EDF decided not to make another bid for the whole company in October.

The EDF proposal unveiled yesterday called for selling half of Constellation's nuclear power assets to the French firm for $4.5 billion, including an immediate down payment of $1 billion in cash, and also selling several non-nuclear power plants to the company for as much as $2 billion. The rest of Constellation would remain roughly the same, publicly traded and operating out of its Baltimore headquarters.

In a letter accompanying the proposal, EDF Chairman Daniel Camus called the offer "a compelling opportunity for Constellation stockholders and a concrete, viable and superior alternative to the MidAmerican offer." The French company also asked 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 earlier this year.

In a detailed breakdown of the proposal filed with federal regulators, EDF said its offer assumes a value of $52 a share. It estimated Constellation's non-nuclear power plants to be worth $5.7 billion and BGE, the company's regulated utility, to be worth $4.2 billion.

The company's commodities trading operation was estimated to be worth $300 million. Counting debts, EDF placed the overall value of Constellation at $10.4 billion - more than double what MidAmerican proposed to pay.

"We strongly believe that Constellation's stockholders deserve a transaction that appropriately values Constellation and delivers that value to all of Constellation's stockholders," Camus wrote.

If Constellation embraces the EDF offer, Justice said, he would not expect MidAmerican to submit a higher offer: "That's not standard operating procedure at Berkshire Hathaway."

Even if it doesn't complete the merger with Constellation, MidAmerican would receive a $175 million termination fee and stock-related payments estimated at $420 million under the agreement.

"They'd make several hundred million dollars just by signing a piece of paper and waiting a few months," Justice said. "At a time when most people are losing money, that's a pretty attractive alternative."

Shares of Constellation rose $2.55, or 10 percent, to close at $27.70 yesterday.

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