Thursday, December 4, 2008

The French Want CEG's Nukes....Time for the CEG Board to Step Up

The narrative in the CEG "notice of special meeting" regarding the Berkshire takeover bid is really great reading.  Of particular interest is the section, Background to the Merger.  You couldn't make this stuff up.

The press seems to be getting a few things wrong.  First, the offer isn't really directed to the shareholders/voters at the Dec 22 meeting.  The CEG Board is voting EDF's 9.5%, and given the institutional ownership, it is hard to believe that whatever the Board recommends won't be approved.  Secondly, CEG is offering 4.5 billion for 1/2 the Nuclear vs. Buffett's $4.7 for the entire business.  However, the business has $7 billion in debt, so their offer isn't quite as high as it sounds.  That is, Buffett gets the company and the debt.  EDF is only bidding on assets.

Aside from that, the background is a comedy of errors.  By everybody but Buffett, who had the cash, a price, and a take it or leave it negotiation style.

From the perspective of EDF.....

1.  They bought about 9.5% in the open market for about $60/share.  That's almost a billion dollars that could have been done via new shares, injecting needed capital.

2.  They signed the agreement limiting their actions to basically deferring to the board: 
Électricité de France International, S.A. (which we refer to as EDFI) acquired Constellation Energy common stock through open market purchases in accordance with an investor agreement, dated July 20, 2007 (which we refer to as the investor agreement) between EDFI and Constellation Energy, entered into in connection with the joint venture arrangement between EDFI and Constellation Energy with respect to development of nuclear projects in the United States and Canada. Under the terms of the investor agreement, EDFI is permitted to acquire up to 9.9% of Constellation Energy common stock and has agreed to vote its shares in the manner recommended by Constellation Energy’s board of directors. EDFI also agreed not to, singly or as part of a group, directly or indirectly, without Constellation Energy’s consent, acquire any additional securities in excess of the 9.9% ownership interest permitted by the investor agreement, participate in a solicitation of proxies, join with any other parties to form a “group” with respect to Constellation Energy common stock (as determined pursuant to Section 13(d) of the Exchange Act), act alone or in concert with others to seek or offer to control or influence, in any manner, our management, board of directors or policies, or seek to make a proposal or public announcement with respect to a merger, consolidation or sale of all or substantially all of the assets or a majority of the outstanding shares of Constellation Energy common stock, or any form of restructuring, or any other proposal inconsistent with the terms of the investor agreement. Under the terms of the investor agreement, EDFI also agreed to restrictions on its ability to dispose of its shares of Constellation Energy common stock. According to the Schedule 13D filed by EDFI on September 8, 2008, as of that date EDFI owned approximately 9.51% of Constellation Energy common stock.
3. They (EDF) tried to buy another 5% to directly inject capital, but the NYSE said no.
Early that afternoon, Constellation Energy sought relief from the NYSE on the shareholder approval requirement, so that EDFI could (if it were willing) immediately invest a larger amount in Constellation Energy. Later in the day, the NYSE denied Constellation Energy’s request.
This is at the same time the Treasury and Fed are taking unprecedented interventions to stabilize banks. The NYSE won't approve a waiver to allow CEG to get a quick equity injection?

4.  EDF made their offer to inject the $500 million contingent on getting the rating agencies to agree to not downgrade if they raised the capital.  The rating agencies were in no mood to chat about hypothetical capital injections.   
In an attempt to satisfy the conditions of EDFI’s proposed equity investment, Messrs. Collins and Thayer contacted S&P and UBS Finance, each of which provided EDFI with the requested assurances. However, when Messrs. Collins and Thayer contacted Moody’s, they learned that Moody’s had already completed its credit review and was prepared to announce a two-notch ratings decrease to Baa3 (one notch above sub-investment grade), with a negative outlook. Constellation Energy urged reconsideration of the pending ratings downgrade and discussed with Moody’s the possible EDFI and MidAmerican investment proposals. Messrs. Shattuck, Collins and Thayer then made a subsequent call to Moody’s seeking to persuade it to change its view. On a subsequent call, Moody’s indicated that its rating committee had convened and was unable to resolve the company’s rating that evening and would take the EDFI proposal back to its committee again on the morning of September 19. However, Moody’s stated that it would not comment on whether a transaction with EDFI would alter its decision to lower Constellation Energy’s credit rating. Thus, Constellation Energy could not provide EDFI with the assurance it required. EDFI was quoted in Bloomberg as stating “EDF[I] has studied the opportunity of increasing its stake in Constellation Energy.... At this stage, EDF[I] considers that all conditions are not met to do so.”
This is just a taste of the various failed attempts to avoid the need to get a Pay Day loan from Buffett.

I suppose that it understandable that a French firm wouldn't realize the chaos in the US markets and the urgency of getting cash in hand.  

Meanwhile, Buffett drove a hard bargain.  In their defense, they didn't want to bail out CEG, just to get to participate in an auction.  Their offer made it very difficult for someone to come in with a higher bid.

Not only that, but the cost of a breakup was high.  A termination fee of $175 million.
Constellation Energy has agreed to pay MidAmerican a termination fee of $175 million if the merger agreement is terminated for any reason other than by Constellation Energy because of MidAmerican’s or Merger Sub’s breach of any representation, warranty, covenant or other agreement made by MidAmerican or Merger Sub.
A costly conversion of Buffett's preferred shares.
Upon the occurrence of a conversion event (as described below) and subject to the receipt of all required regulatory approvals, the Series A Preferred Stock will be automatically converted into (A) 35,679,215 shares of Constellation Energy common stock (representing approximately 19.9% of the number of shares of Constellation Energy common stock that were outstanding on September 22, 2008, or approximately 16.6% on an as-converted basis), subject to certain adjustments, and (B) $1.0 billion in aggregate principal amount of senior unsecured promissory notes of Constellation Energy due December 31, 2009 (which we refer to as the 14% Senior Notes). The Series A Preferred Stock pays dividends at 8% per annum compounded quarterly and payable quarterly in arrears.
The 8% preferred becomes a 14% note. And Berkshire gets 35 million shares of stock. 

However, the board can consider unsolicited offers.  But once/if it does, it becomes a conversion event.  Buffett can make another bid OR he can take his breakup fee, new 14% note and 35 million shares.

Nevertheless, the board still represents the shareholders.  In theory, at least.  They didn't (and couldn't) waive all rights regarding alternative transactions.  They can consider a "superior proposal."
A “superior proposal” means any bona fide written takeover proposal that Constellation Energy’s board of directors determines in good faith (after consultation with a financial advisor of nationally recognized reputation) to be more favorable (taking into account (i) all relevant legal, financial, regulatory and other aspects of such takeover proposal and the merger, (ii) the identity of the third party making such takeover proposal, (iii) the anticipated timing, conditions and prospects for completion of such takeover proposal, including the prospects for obtaining regulatory approvals and financing, and any third party shareholder approvals and (iv) the other terms and conditions of such takeover proposal) to Constellation Energy’s shareholders than the merger and the other transactions contemplated by the merger agreement (taking into account all of the terms of any proposal by MidAmerican to amend or modify the terms of the merger and the other transactions contemplated by the merger agreement) and that is reasonably likely to be consummated.
If the EDF proposal to buy 1/2 the US Nuclear assets for $4.5 billion isn't superior, then I would like to know what a superior proposal would look like.  EDF is primarily owned by the French government.  

The management and board made mistake after mistake prior to the Buffett rescue.  They now have an opportunity to get some additional money for the shareholders who were blown up by a lengthy series of incompetent management.  Time for the board to step up.

Unfortunately, the French probably don't want to just get a better deal for their shares.  The Buffett offer is worth $400 million to them, and another 20% wouldn't justify the efforts they are now making.

They want the nukes, and are willing to pay up big time.  The board just needs to take the money.

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