Chicago-based Exelon's $7.9 billion deal with Constellation Energy

April 28, 2011

By The Associated Press and City Room

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(Getty File/Scott Olson)

Chicago-based Exelon Corp. agreed to buy Constellation Energy Group Inc. in a $7.9 billion stock deal Thursday, the latest in a string of acquisitions in the electric power industry.

Three times since 2003 Exelon CEO John Rowe has tried and failed to acquire a smaller rival. Maybe the fourth time will be a charm.

Rowe, the longest-serving utility CEO in the country, has long been a proponent of consolidation. Now the market conditions appear to be on his side. A combination of lower power prices and rising costs tied to tightening environmental standards has been the catalyst for several recent deals, including Duke Energy Corp.'s $13.7 buyout of Progress Energy Inc.

Constellation shareholders will receive 0.93 shares of Exelon for each Constellation share. That's worth $38.59 a share, a 12.5 percent premium over Constellation's closing price on Wednesday when news of the deal began to leak out.

Following the deal, expected to close in early 2012, Exelon shareholders will own about 78 percent of the company and Constellation shareholders the rest. The companies said they expect the combination to be neutral for Exelon's adjusted earnings in 2012 and add 5 percent in 2013.

In Constellation, Exelon would acquire a company much like itself - with one important difference. Along with a regulated utility and a wholesale power division, Constellation has among the largest retail power divisions in the country.

Under the deal, the combined companies would retain the Exelon name and be based in Chicago. Exelon's power marketing business and Constellation's retail and wholesale business will be consolidated under the Constellation brand and be headquartered in Baltimore.

Analysts say Constellation's large retail arm and Exelon's large wholesale power division could work well together.

"Constellation's retail arm is a good fit, because it tends to do well when wholesale markets are bad," said David Grumhaus, a utility analyst at the Chicago hedge fund Copia Capital.

When power prices fall, as they have in recent years, retail electric companies can more easily convince customers to switch service plans by offering lower rates.

"It's a deal that makes sense," Grumhaus said.

Rowe created Exelon with the 2000 merger of Unicom, the parent of the Illinois utility ComEd, and the Pennsylvania utility PECO. The company now serves 5.4 million electric customers in Illinois and Pennsylvania and 490,000 gas customers in Pennsylvania. But since then, Rowe has been unsuccessful in his attempts to buy Illinois Power Co., Public Service Enterprise Group Inc., and NRG Energy Inc.

This deal will be Rowe's parting shot. If the deal is completed, Rowe would step aside. Exelon president Chris Crane, who is credited with rehabilitating the company's nuclear operations, would become CEO of the combined company. Constellation CEO Mayo Shattuck would become chairman.

In addition to ComEd and PECO, Exelon, based in Chicago, owns a large wholesale power division anchored by the nation's largest fleet of nuclear plants.

Nuclear plants don't emit mercury and other pollutants that are subject to tightening environmental regulations. So, Exelon doesn't face the same costs as other utilities that rely on coal-fired generation.

But Exelon has warned recently of higher costs because nuclear regulators are expected to issue safety rules in the wake of the nuclear crisis in Japan.

Also, Exelon, like other wholesale power companies, has seen revenue and profit fall along with electricity prices. In much of the country, power produced with natural gas sets the price of electricity for all generators. Discoveries of vast reserves of natural gas in shale formations across the U.S. have kept those prices low.

Constellation, based in Baltimore, is the parent of the Maryland utility Baltimore Gas and Electric, which serves 1.2 million electric customers and 630,000 gas customers. It also owns power plants, including three nuclear power stations, in 13 states. It sells power to commercial and retail customers across the country.

Earlier this month AES Corp. agreed to buy DPL for $3.5 billion. Duke agreed to buy Progress in January. If approved by regulators, that deal would create the biggest electric utility in the nation.