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MidAmerican, EDFI Jockey for Constellation's Hand

Just when it appeared that MidAmerican Energy Holdings Co.'s acquisition of Constellation Energy Group would be a smooth transaction, EDF International (EDFI), the largest power producer in Europe, last week offered to acquire Constellation Energy for $8.50/share more than what Berkshire Hathaway's MidAmerican Energy has bid. But MidAmerican Energy did not see the rival bid as a threat.

"We're pleased that Constellation Energy believes that MidAmerican Energy Holdings' offer is superior and we look forward to quickly closing the transaction," said MidAmerican Energy spokeswoman Ann Thelen. NGI calls to Constellation Energy were not returned.

In a filing with the Securities and Exchange Commission (SEC) Sept. 22, EDFI, a subsidiary of EDF SA, said it submitted to Constellation's board of directors on Sept. 19 a joint offer of $6.2 billion, or $35/share, together with Kohlberg Kravis Roberts & Co. LP and TPG Capital LP.

MidAmerican on Sept. 18 reached a definitive agreement to buy all of the outstanding shares of Constellation Energy for $4.7 billion, or $26.50/share (see NGI, Sept. 22). Constellation's board had not responded to EDFI's offer, the French energy company told the SEC. Constellation is the parent of Baltimore Gas & Electric and the nation's largest wholesale power seller and major natural gas supplier.

However, Constellation CEO Mayo A. Shattuck III in a conference call last week said the MidAmerican bid was the best available and was more likely to win a quick approval from regulators. MidAmerican, which is owned by Warren Buffett's Berkshire Hathaway, contributed $1 billion in equity last Monday to prop up Constellation's trading business.

EDFI said earlier this month that it increased its stake in Constellation to 9.51% (almost 17 million shares) from 4.9%. EDFI and Constellation also have a joint venture to build and develop nuclear power stations. In reporting that Constellation has not responded to its offer, EDFI said that as a shareholder of Constellation it "believes that the MidAmerican transaction does not generate value creation expected by shareholders." Further, EDFI said it "remains committed to pursuing opportunities in the U.S. nuclear industry and is reviewing all of its options with respect to increasing the value of its investment in Constellation for itself and Constellation's other shareholders."

After Constellation's board of directors accepted MidAmerican's bid, Constellation was hit by a wave of lawsuits from shareholders who are seeking to block the company's buyout by MidAmerican and who claim that Constellation inflated its financial results and intentionally mislead investors.

At least five shareholder lawsuits have been filed in Baltimore City Circuit Court, claiming that Des Moines, IA-based MidAmerican's offer did not reflect the true value of Constellation. One of the lawsuits said that while the offer by MidAmerican represented a 7% premium over Constellation stock's closing price on the day before the transaction was announced, the price was a 60% discount to where the stock was trading two days prior to the deal.

In related action, a class-action lawsuit has been brought in New York on behalf of buyers of Constellation Energy stock. The plaintiffs allege that the company's financial results were inflated by overly optimistic assumptions, and its exposure to credit problems of trading partners (Lehman Brothers) was much greater than represented.

In another case, the Shuman Law Firm said it is investigating the proposed acquisition, noting that Constellation's failure to respond to EDFI's offer "may result in damage" to Constellation shareholders by impeding the maximization of shareholder value. The firm, like many others, is seeking to represent Constellation common stockholders against the company.

The terms of EDFI's proposal for Baltimore based-Constellation Energy included an immediate investment of $1 billion last Monday in exchange for preferred stock convertible to 10.4% of Constellation voting equity and 5.6% of nonvoting equity convertible to voting equity; and 2) $750 million of 10% senior notes, EDFI said.

"The other terms and conditions of the proposal request were either the same as or in the aggregate more favorable to Constellation than the terms and conditions of the preferred stock investment proposed by MidAmerican and announced" by the two companies, EDFI said in its SEC filing.

Moreover, "the proposal request offered the immediate commencement of negotiations of a merger agreement to acquire all of the outstanding capital stock of Constellation at a price of $35/share and that such negotiations would be completed to permit execution of a definitive merger agreement by Oct. 9...EDFI as a shareholder believes that the MidAmerican transaction does not provide adequate value to its shareholders," EDFI said.

If MidAmerican and Constellation were to complete their merger, Constellation would become a wholly owned subsidiary of MidAmerican, the SEC filing said.

The combination of MidAmerican Energy and Constellation Energy would create a natural gas shipping giant, according to a new report from Bentek Energy. "Assuming MidAmerican Energy Co. acquires Constellation as announced, the combined company will become the third largest pipeline capacity holder in the U.S.," the research an analysis firm wrote in its Capacity Tracker report. Constellation, the shipper with the most interstate pipeline transportation contracts with 289, has a total contract maximum daily quantity of 1.6 MMDth/d. MidAmerican Energy has 42 contracts also with a total contract maximum daily quantity of 1.6 MMDth/d, the Golden, CO-based firm found.

The completion of the merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the merger by the holders of a majority of the outstanding shares of Constellation Energy; receipt of the required regulatory approvals; expiration or termination of the waiting period under the Hart-Scott-Rodino antitrust law; the absence of the occurrence of a material adverse effect from the date of the merger agreement; all unsecured senior debt of Constellation being rated investment-grade or better with no less than a stable outlook by the three credit ratings agencies; and several other conditions.

In addition to the Federal Trade Commission's antitrust approval, the transaction will require the approval of several other agencies: the SEC, the Federal Energy Regulatory Commission, Nuclear Regulatory Commission, the Maryland State Department of Assessments and Taxation, the Maryland Public Service Commission and the Federal Communications Commission, according to the SEC filing.

Hopes of smooth and speedy regulatory reviews could be dashed if history is any predictor. After 10 months of wrangling, FPL Group Inc. and Constellation called off their $31 billion merger in October 2006, several months after it became clear that the companies faced a protracted battle with Maryland legislators and regulators over the transaction (see NGI, Oct. 30, 2006). The cancellation of the FPL-Constellation merger followed a similar breakup of the Exelon-Public Service Enterprise Group merger in September 2006 (see NGI, Sept. 18, 2006). State regulators and legislators recently have become more aggressive in demanding rate concessions from energy companies because of rising energy costs. Citing "insurmountable hurdles" at the New Jersey Board of Public Utilities, Exelon and PSEG gave formal notice of termination of their merger nearly two years after the deal was first announced.

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