Constellation, The French, Buffett & A Value Trap (CEG, BRK-A)

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The other shoe has dropped. Constellation Energy Group Inc. (NYSE:CEG) has accepted Electricite de France’s (EDF) offer of $4.5 billion for 49.99% of the company’s nuclear assets (rather than the whole company). We detailed the offer two weeks ago when it was announced. The total value of the deal is about $6.5 billion.

Constellation has terminated its merger with MidAmerican Holdings, a subsidiary of Warren Buffett’s Berkshire Hathaway Holdings (NYSE:BRK-A). MidAmerican’s offer totaled about $4.7 billion for all of Constellation’s assets. MidAmerican collects a breakup fee of $175 million.  What is interesting is that the stock options have never valued Constellation anywhere near what the headlines would have you believe.

In addition to its stake in Constellation, EDF gets a put option on $2billion worth of Constellations non-nuke assets for two years, and animmediate transfusion of $1 billion in cash.

There is no financing condition to EDF’s offer because the company willfinance the deal through its own funds and credit facilities. The twocompanies expect the deal to close in six to nine months.

As we outlined what would have to be paid, it looks like Mr. Buffettand friends win either way.  What is interesting is that this new deal doesn’t increase the option values from the same time of that report.  In fact, the same options analyzed then are worth even less now.

When EDF first made its offer, it appeared that it could have been anattempt to boost the value of EDF’s nearly 10% stake in Constellation.But apparently Buffet would have none of that. Either he’d getConstellation (which was desperate for cash) or he’d walk with thebreakup fee. Looks like he chose to walk. 

Paul Ausick
December 17, 2008