With significant falls in the market value of many energy companies, market leaders are buying up their now undervalued competitors. Warren Buffet acquired Constellation Energy after a 60% drop in Constellation’s share price and now America’s largest nuclear power generating company Exelon has launched a share-for-share tender offer for NRG energy.
NRG has lost over 50% of its value in the last two months, it was worth $38 at the end of August but traded at $15.17 ten days ago. The acquisition by Exelon is offering a fixed ratio of 0.485 Exelon shares for each share of NRG outstanding, valuing NRG shares at $26.43. The combined company would be the largest power company in the U.S., with a market capitalization of $40 billion
NRG’s board has yet to accept or deny support for the offer but Oil Energy Money predicts the offer as it stands is simply too low to succeed.
NRG is trading today at $23.21, implying that speculators are rushing in with expectations of a higher bid. NRG’s power plants alone are worth $63 a share based on transactions over the past two years, says Gordon Howald, an analyst at Calyon Securities USA. “The upside potential for NRG as a standalone company is much higher, assuming they can get through this credit crisis.” said Howald, ”I think they have enough strength to say, ‘This is not good enough.’”
As well as the low price, the fixed ratio of Exelon-to-NRG shares means that if Exelon shares fall, NRG is paid less. Given the unstable markets and length of merger approval in utility companies, a collar, or range of prices, should be agreed upon before accepting. That way, if Exelon shares lose value, NRG should be free to walk away or renegotiate better terms.
Exelon stands to gain an inexpensive nuclear power plant and regional diversification outside its Illinois and Pennsylvania operating bases. The combined company would be America’s largest power company, generating enough power for 14.4 million U.S. homes. Exelon claims the deal would immediately boost earnings and cash flow and be earnings accretive within the first calendar year.
“Exelon couldn’t build the plants for the same price it would buy NRG for,” said Nathan Judge, an analyst at Atlantic Equities. With all the benefits for Exelon, a higher, better offer for NRG shareholders should be on the cards.
