Oil Energy Money

One of America's Richest Men Pictured Enjoying His Growing Nuclear Empire

When the cavalry arrived to save Wall Street, Berkeshire Hathaway chairman Warren Buffet led the charge with a $5bn injection in Goldman Sachs.  But Buffett should hold his horses for the takeover of Constellation Energy.

Buffet’s MidAmerican holding company offered $4.6bn cash for Constellation, at $26.50 per share, and it seemed like a done deal.  Constellation’s stock price had fallen 60% due to bad bets in the energy futures market and S&P was threatening to lower its credit rating from BBB.  The company urgently needed a lifeline.  Buffet’s $31bn cash hoard swooped in, providing a $1bn injection of cash and increasing investor confidence.  Most consider the price a steal, $26.50 was a 10% premium on Constellation’s trading price.  According to this report, A new nuclear reactor may cost up to $12bn to build.  MidAmerican just picked up Constellation’s fully amortized reactor for $4.6bn.  The benefits will increase as initiatives to reduce carbon push up traditional energy production costs.  In fact, Constellation is based in Maryland, one of the ten RGGI states selling carbon credits to encourage clean energy such as nuclear. 

But some Constellation shareholders are suing in light of a higher bid by EDF and private equity superboutique KKR.  Their $35 per share offer, a mix of cash and securities, was rejected by Constellation’s board for undisclosed reasons.  Further, MidAmerican’s bid included No Shop provisions preventing Constellation from actively attracting other buyers. 

But EDF is hoping that such antitakeover defenses can be repealed by state antitakeover courts as not being in shareholder’s interests.  The Revlon Duties state that once it is clear a company will be sold,  its board of directors must choose the offer which maximizes shareholder value.  MidAmerican’s bid doesn’t fit that criteria.

Or does it? An American energy company offering cash is an easier deal to make than a French national offering securities which are hard to value.  The bid may be held up due to its international nature and the American government’s refusal to allow a foreign interest to control nuclear reactors.  Hence EDF’s partnership with American private equity. 

Despite a $10 increase in the price paid per share, which may increase further as EDF makes another bid, Constellation’s board may have been right in accepting Buffett’s offer.  It’s a lowball no doubt, but it’s a no risk, fast lowball which a company in trouble badly needs.

The irony is that companies with steady cash flows and high assets were prime targets for private equity firms such as KKR in the 80′s who would use a little equity to take on large debts to buy the company, using the target’s assets as collateral.  Soon the cash flows would pay off the debt and the company would be resold, turning that little equity in to a huge profit.  But the recent financial crises has created a backlash to PE groups and unless a white knight appears (and is wanted by Constellation) it seems like Buffet has pulled off another low price coup.

One can almost imagine the billionaire hunching over, joining his fingers and muttering ’Eeeeeeexcellent…’