PEG Public Service Enterprise Group Inc

Exelon Corporation (EXC) entered into a definite agreement to acquire Constellation Energy Group Inc. (CEG), for about $7.9 billion. Exelon is expected to issue 0.93 of its shares for every share of Constellation owned by the latter’s shareholders.

The exchange ratio agreed upon represents an 18.1% premium to the 30-day average closing stock prices of Exelon and Constellation as of April 27, 2011. Following the completion of the merger Exelon shareholders will have 78% ownership of the combined company, while the rest will belong to Constellation shareholders.

The merger is approved by the shareholders of both the companies and the union is subject to overcoming some regulatory hurdles. The companies expect to close the merger by early 2012.

Baltimore based Constellation Energy is a supplier of power, natural gas and energy products and services for homes and businesses across the continental United States.

Benefits

Nuclear power plants are the major source of power generation for Exelon. As the deal was finally chalked out, Exelon will have access to Constellation’s nuclear power plants in New York and Maryland. This will come as a big boost to its generation capacity.

This merger will create the nation’s number one competitive energy products and services supplier by load and customers as well as the biggest competitive power generator having the largest nuclear fleet in the U.S. The consolidated entity will also produce power at much lower costs, helping them to jointly work on fuel innovation, increase efficiency and provide better options and rates to customers.

Success after Failed Attempts?

Despite obvious positives to be reaped from such a consolidation, the deal came after both the companies showing a dubious track record of failing to acquire or be acquired by other companies. On a few occasions, Exelon has made unsuccessful attempts to clinch acquisitions. The target companies, for instance, were NRG Energy Inc. (NRG) in 2008, Public Service Enterprise Group Inc. (PEG) in 2004 and Illinois Power Co. in 2003.

Constellation Energy came close to be acquired twice before both the deals fell through. NextEra Energy Inc.'s (NEE) attempt to buy Constellation was thwarted in 2005 by the interference of state officials. Another deal to be acquired by Berkshire Hathaway failed in 2008.

Recent Merger in the Power Sector

In a climate of mergers and power deals this year, another U.S. energy company, The AES Corporation (AES), announced in April that it has entered into a definite merger agreement with DPL Inc. (DPL) and the transaction is valued at $4.7 billion.

Actual & Estimates

Exelon reported strong first quarter 2011 results surpassing the Zacks Consensus Estimates for both the top and bottom lines. Going forward, the company expects its operating earnings for 2011 in a range of $3.90 – $4.20 per share, while the second quarter 2011 earnings are pegged in the range of 90 cents to $1.00 per share.

The Zacks Consensus Estimates for second-quarter 2011, fiscal year 2011 and fiscal year 2012 are presently 98 cents per share, $4.03 per share and $3.04 per share, respectively.

To Conclude

The Exelon-Constellation merger allows concentration of nuclear power generation and brings economies of scale. This is important in the aftermath of the Fukushima Dai-Ichi plant atomic disaster in Japan, which has raised questions about nuclear safety and is sure to inhibit the pace of future construction.

Definitely heartening is the news that the U.S. Nuclear Regulatory Commission has recently approved Exelon’s request to boost its nuclear generation capacity in two of its units. This in a way suggests that the nuclear plants were properly run by Exelon and it can safely add more generation to its existing nuclear capacity.    

We appreciate this prudent and beneficial merger agreement as it will create the nation’s cleanest power generation fleet, explore opportunities in commercial solar energy development and also focus on efficiency.

Exelon Corporation currently retains a Zacks #3 Rank (short-term Hold rating). We maintain a longer-term Neutral recommendation on Exelon.

Based in Chicago, Illinois, Exelon Corporation, a utility services holding company, engages in the generation, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers.

 
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