Advice is: Reject Buffett

The Baltimore Sun

A proxy advisory firm recommended yesterday that Baltimore's Constellation Energy Group shareholders reject the company's $4.7 billion pending sale to Warren Buffett, raising another doubt about the takeover amid reports that Constellation favors an offer from a French utility.

Constellation is nearing an agreement to sell half of its nuclear power business to Electricite de France for nearly the same price as Buffett's MidAmerican Energy Holdings Co. offered for the entire company, according to several published reports yesterday.

The parent company of Baltimore Gas & Electric prefers an agreement with Paris-based EDF, its largest shareholder, but a deal is contingent on waivers of bank covenants, according to Bloomberg News and Reuters, which quoted people familiar with the situation.

One covenant under a $1.23 billion credit line closed last month with UBS and Royal Bank of Scotland prohibits Constellation from selling assets, except for sales in the ordinary course of business, according to the loan contract.

Reports of EDF's proposal sent Constellation stock up $1.44, or 5.3 percent. Shares closed at $28.74 yesterday.

Constellation spokesman Rob Gould and EDF representatives declined to comment yesterday.

But MidAmerican Chairman David Sokol told CNBC yesterday that his company "will not counterbid; ... the structure of the transaction [that EDF has proposed] is not one we would be comfortable with."

MidAmerican spokeswoman Ann Thelen declined to make any further comment.

Even if the deal falls through, MidAmerican would receive hefty payments, including a $175 million termination fee.

The recommendation against the MidAmerican deal by Egan-Jones Proxy Services came a week before shareholders have their say in a scheduled Dec. 23 meeting in Baltimore. Egan-Jones is one of several advisory firms that provides guidance on proxy proposals and corporate governance issues.

"Egan-Jones believes that the EDF offer is significantly superior to that agreed upon with MidAmerican Energy Holdings Company and would provide the company's shareholders with greater value, although it is subject to some uncertainty regarding U.S. regulatory approval," the firm concluded.

EDF, which has a 9.5 percent stake in Constellation, 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.

Other large shareholders, such as Baltimore's T. Rowe Price Group, declined to comment. But several individual Maryland investors say they would be short-changed under the MidAmerican deal, which offers $26.50 a share. Some have filed at least a half-dozen lawsuits challenging the deal.

"I thought it was a bad deal all along," said David J. Hammond, 66, a retired BGE employee from Manchester, who said he had already voted "no" by mail. "They're offering the same amount as Warren Buffett for half-ownership of the nuclear plants."

EDF offered to 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 BGE and its coal and natural gas power generation business, would continue to operate as a publicly traded, Baltimore-based company. Under the MidAmerican deal, Constellation would become a subsidiary of Buffett's company.

While not changing its initial recommendation in supporting the MidAmerican deal, Constellation's board began talks last week with EDF on its unsolicited offer.

Constellation agreed to be acquired by MidAmerican in mid-September to avoid possible bankruptcy as its commodities-trading operation faced a liquidity crisis amid the financial sector meltdown.

As part of the deal, Buffett provided $1 billion in cash, averting a fatal credit downgrade that posed a "real risk of immediate bankruptcy," according to recent documents filed with the Securities and Exchange Commission.

In choosing MidAmerican, Constellation rebuffed EDF's earlier $35-a-share offer for the entire company.

EDF and Constellation teamed up last year to develop and invest in new nuclear reactors under a joint venture called UniStar. In the fall, UniStar asked state regulators for a permit to build a third reactor at Calvert Cliffs in Southern Maryland.

The Maryland Public Service Commission, which had been expected to weigh in on the proposed reactor by year's end, now says a decision will not be issued until February. Even with the MidAmerican deal pending, Constellation has taken steps to shore up its balance sheet amid tightening credit markets. The company is selling several assets, moves that could increase its liquidity by up to $1.5 billion.

And to deal with bleak financial conditions, Constellation announced job cuts this month of more than 800 people, half in the Baltimore area.

Even if MidAmerican doesn't complete the merger with Constellation, it would walk away with the $175 million termination fee, 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, by Dec. 31, 2009.

Baltimore Sun reporter Scott Calvert contributed to this article.

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