Buy the Debt, Sell the Stock

Per the AP, again:

The company now expects to earn between $2.90 and $3.30 per share for the year. A company spokesman said the prediction includes the impact of the recent sale of a portion of its nuclear business. Constellation Energy Group agreed on Wednesday to sell half of its nuclear-power business to Electricite de France SA for $4.5 billion, scuttling a deal struck in September with Warren Buffett's MidAmerican Energy Holdings Co.

Constellation also said it may cut its dividend by 50 to 60 percent to improve cash flow and pay down debt. It last paid a dividend of 47.75 cents in October.

At this point I don't see the advantage of owning the stock @ 24 yielding a little over 3% when you could own the bond, cegpra @ $19, yielding 11%.   They would have to increase their dividend 20% a year for 5 years to get back to the 47.75 cents.  Meanwhile, their new sense of stewardship which is motivating them to pay down debt can only help the bond rating.  If by some chance they got the firm up to investment grade, it would be a windfall for the preferred.  If things don't work out as well, the debt is senior to the stock and we know someone would buy the other 1/2 of the nuclear plants.

  

Conference Call

Which I didn't bother to listen to.  Here is a link to their pitch slide. 

Everything sounded great except the dividend reduction of 50 to 60%.

With 200mm shares, the current dividend is about $380 million.  They offered guidance of $2.90 to $3.30.  Plus 6% to 8% compound growth for 5 years. 

And they want to cut the dividend of $380 million in half or more?  I suppose some dividend reduction is "prudent", etc.  Still, this is a utility and a lot of people own it for the dividend.

No wonder the stock price got killed.  Management needs to think its commitment to putting some cash in shareholder wallets.  People don't really want to wait 5 years for management to earn back the money they blew because of negligence.  How about a bonus moratorium or some sense of contrition regarding exactly how awfully they blew it.

They could think really hard before they do this.  Or not.

CEG Downgraded by Moody's to Baa3

Moody's cut CEG's credit rating this morning:

Moody's Investors Service on Wednesday lowered Constellation Energy Group's senior unsecured rating to Baa3 from Baa2 and kept Constellation's ratings under review for possible downgrade. The move follows an earlier announcement that Constellation and MidAmerican Energy Holdings have decided to terminate their proposed merger agreement. Constellation also said it reached a deal to sell a 49.99% interest to Électricite de France. "The rating downgrade incorporates the risks associated with CEG's decision to continue the restructuring of its sizable commodities business as a standalone entity, a near-term liquidity profile that appears weak in light of current volatile market conditions and the ramifications of the sale of a minority interest in its crown jewel assets" said Scott Solomon, Moody's vice president.

Baa is investment grade, but this year, CEG has slipped from Baa1 to Baa3.   The crisis that led to the Mid American offer was due to the implication of a credit rating cut to margin requirements for energy derivative positions.  From the SEC filing:

The actual amount of collateral that Constellation Energy would be required to post in the event of a multi-notch downgrade fluctuates based on market conditions and contractual obligations at the time of a downgrade. Management also announced an intention to sell the company’s upstream gas business and to sell or recapitalize its international coal and freight intermediation business, all as part of a broad effort to reduce the capital demands and perceived volatility of a portion of the company’s commodities business by reducing exposure to commodities counterparties, releasing a significant portion of posted collateral and monetizing certain derivative positions. Management took these actions after determining in early August that the amount of additional collateral Constellation Energy could be required to post in the event of a downgrade of its credit ratings was greater than previously estimated. On August 11, 2008, in its second quarter 2008 Form 10-Q, Constellation Energy reported the revised estimates of such potential additional collateral posting requirements as of March 31, 2008 at $129 million for a one-level downgrade, $844 million for a two-level downgrade and $3.23 billion for a three-level downgrade. The Form 10-Q also reported that as of June 30, 2008, these amounts were $386 million, $1.37 billion and $4.57 billion, respectively, and as of July 31, 2008, the amounts were $106 million, $681 million and $3.37 billion, respectively.

The "multi notch" downgrade was 2 notches or from Baa1 to Baa3. This is the exact downgrade that occurred today.  Per the 3rd quarter 10-Q, the results of a rating downgrade were: 1 level to Baa3 - $171 million  2 levels to Ba1 - $2.2 billion.  However, the report later stated:

The estimated collateral obligation amounts above have declined compared to those reported in our quarterly report on Form 10-Q for the quarter ended June 30, 2008. This decrease is due to changes in open positions, price movements, and posting of additional collateral requirements resulting from our credit ratings being downgraded in the third quarter of 2008. As of October 31, 2008, incremental downgrade collateral postings for a one level and two level downgrade have changed to $178 million and $1,865 million, respectively.

It's hard to say where they would be a month and a half later regarding their reduction of this exposure, but with any sort of prudent management and the decline in energy prices, one would hope that the amounts would be materially reduced.  From June 30 to October 31, the exposure from a downgrade to to Baa decreased from $4.57 billion to $1.87 billion.  

CEG is in a position where it needs to be able to fund a downgrade to "junk" in order for it to maintain its investment grade rating.  Not particularly unusual in the credit world where the criteria for a rating is the absence of the possible need for cash, and vice versa.  

The CEG energy traders had another month and a half to reduce their exposures, and have the Buffett billion (at the rate of 14%), an immediate infusion of $1 billion from EDF of $1 billion, and the proceeds of the asset sale of an additional $3.5 billion, less whatever they intend to repay.  

Moody's has no upside in optimism.  However, it is not at all unreasonable to think that any and all issues regarding collateral calls from energy trading are either solved or being solved.  Otherwise the board would have been highly imprudent in recommending the EDF proposal in an environment where all attention is being focused on that particular issue.  

A ratings upgrade to Baa1 wouldn't seem out of the question -- offering significant upside to the class A preferreds as well as the common stock.   

CEG - D Day

Interesting day. Trading halted, the company announced that it was terminating the MAE deal and doing the EDF deal. The stock responded by flirting with 30 and then falling to 23. It's obvious that anyone hanging around for an auction of the company needed to move on and the remaining arbs went home, leaving little liquidity for sellers. 

I don't think the negative market reaction tells us much more then people don't like uncertainty if it doesn't have a cap on the downside. This leaves us with the question, what is the company worth? I don't see the stock doing anything until people regain some confidence that the problems from September have been dealt with in a systematic way. CEG laid out a plan, but people want to see execution.

At the point where CEG can demonstrate some solidity, then it deserves a valuation that more closely reflects the value of its businesses.

I discussed CEG valuation in an earlier post. I even included a spreadsheet for your enjoyment. I had laid out EDF's proposal in another post.

The detailed EDF valuation would be my starting post to get a more in depth view of CEG's value.

Meanwhile, for those that are looking for value in fixed income, the preferred A shares are now yielding 12%, since the .08625 preferred is selling for $18/share ($25 par).

If the company can regain its footing with the $4.5 billion asset sale, today's preferred yield of 12% and the common yield of 7% are generous compared to peers. Personally I think buyers at these prices and better will do well, but it may take longer then anyone wants to wait.

CEG/MAE/EDF

All the news:

1.  CEG is leaning toward the EDF offer.

2.  MEC said they won't make another bid.

3.  Options expire Friday the 19th.

4.  The Meeting is Tuesday, Dec 23.

I tend to think that Buffett walks on this one.  The CEG board needs to make a solid deal with EDF and make it quickly.

What to do?  The company should be worth $35/share, minimum,  after the breakup costs.  However, the Buffett offer of $26.50 will no longer provide a floor.  There will be no bidding war.  Among other reasons, they really aren't competing offers.  Buffett wants to buy the company and considers it a "bolt on" acquisition for MEC.  He isn't interested in investing a lot of capital in Nuclear energy.  EDF only cares about Nuclear Power and doesn't seem to be interested in owning a utility.  

Management wants to keep their jobs.  

No one else has the capital and interest to make another bid for the entire company.

 

 

CEG After Hours - WOW

The Stock closes @ $27.30. 50,000 shares trade @ $26.80.  Thats $25k below the close for that trade.  Then this announcement from Bloomberg.  The stock moves up to $29.  I've taken a 50 cent beat down any number of times, so I don't feel too bad for Mr. 50k shares.  

That's the after market for you.  Wonder who dumped the 50k shares?

EDF vs CEG/Mid American Valuation

This is a first step comparison between the EDF pro forma valuation in their proposal letter and the CEG fairness valuation.

There is a big difference.  $5 billion vs. $10 billion.  

I put them on a spreadsheet for your enjoyment.

This is the first time I have linked a blog to a spreadsheet.  I'm hoping to add some depth and give people a little more for their time.  

I am only going to comment on the single biggest difference.  The fairness calculation used a minus $2 billion or $10/share for the energy trading valuation.  

Here is what the proxy narrative says:

In an effort to estimate the potential value that the company’s equity holders might realize if the company were to file for bankruptcy, Messrs. Collins and Thayer, together with other members of Constellation Energy’s finance department, estimated the potential fair values of the company’s businesses, other than the global commodities business, at between $12.0 and $13.0 billion. The estimates of fair value of the company’s businesses that were used reflected management’s knowledge of the company’s businesses and of the potential range of market values for such businesses. Such values did not reflect any material discount for the potential negative effects of a bankruptcy filing. Management did not value the global commodities business because it believed that the value of such business was highly unpredictable and would be subject to the greatest degree of volatility and uncertainty in a bankruptcy, however, it did take into account the potential change in valuation resulting from fluctuating commodity prices and the cost of capital. Management believed that it was reasonably possible that the global commodities business could generate a net loss of more than $2.0 billion following a bankruptcy filing, and therefore management concluded that a loss of this magnitude was the most appropriate number to utilize in its estimate of the potential fair value of Constellation Energy. In light of these estimates, management observed that if the global commodities business, following a bankruptcy filing, generated a net loss (and thus had a negative value) of more than $2.0 billion, then after repayment of Constellation Energy’s then-outstanding indebtedness of approximately $6.0 billion, the aggregate equity value for holders of Constellation Energy common stock would likely be less than $26.50 per share or $4.8 billion in the aggregate. Management’s conclusions reflected the following, which did not include any reduction in values to reflect the substantial expenses of a bankruptcy process or the disruptive and damaging effects on business that management expected would result from a bankruptcy filing:

• Fair value of businesses other than global commodities                 $ 12.0-$13.0 billion
• Less repayment of outstanding indebtedness                                    $ (6.0 billion )
• Less net loss (negative value) of global commodities business       $ (2.0 billion )
• Net equity value (before costs and expenses)                                     $ 4.0-$ 5.0 billion  

• Net equity value per share (before costs and expenses)       $ 21.82-27.39

Management observed that it could not reasonably assess the magnitude of potential deterioration in the value of the company’s businesses as a result of a bankruptcy filing, particularly if the company had to make an immediate filing without having a substantial debtor-in-possession loan in place to provide needed liquidity, or the impact of disruption to the business and the substantial costs and expenses of a bankruptcy process. Management also observed that the impact of a bankruptcy filing and of significant liquidity constraints would likely be most severe on the global commodities business. In addition, Mr. Collins expressed his belief that Constellation Energy would have difficulty managing its global commodities business as a result of the likely loss of counterparties willing to transact business with Constellation Energy following the initiation of bankruptcy proceedings. Additionally, Constellation Energy’s ability to manage its competitive supply business also would likely be materially impaired, as customers likely would not be willing to enter into new contracts, and Constellation Energy might not be able to manage the supply requirements of its existing customers. Management concluded that, in light of this information, and taking into account the uncertainties and costs of the bankruptcy process and the significant potential for such process to negatively affect the company’s business, it was likely that the $26.50 per share price proposed by MidAmerican was more than the company’s existing shareholders would receive in the event of a bankruptcy filing. Management also observed that a bankruptcy filing brought with it the potential to damage recovery by the company’s creditors, whereas the transaction proposed by MidAmerican was likely to avoid such a result. Management reviewed its estimates with Morgan Stanley.

From my perspective -- these are the key points

1. The last comment about creditors -- all well and good, but if bankruptcy is off the table, then it is no longer relevant.

2. $26.50 is a good number compared to bankruptcy -- ok, but bankruptcy is again off the table.

3.  the -$2 billion valuation for Energy Trading was based on bankruptcy.

Once again:

Management believed that it was reasonably possible that the global commodities business could generate a net loss of more than $2.0 billion following a bankruptcy filing

Reasonably possible doesn't mean highly likely. It doesn't mean probable. And it didn't explain exactly how this reasonably POSSIBLE value would occur.  Frankly, BK is bad and a lot of bad things are reasonably possible.  Still, in the 3Q financials, there were no material trading losses.  Right now, I would say that the negative $2 billion needs to go to zero.

There needs to be a serious consideration regarding how energy trading would be supported to guarantee no collateral induced meltdown.  

That leaves us with a $3 billion gap.  Or I would say more like a $4 billion gap.  That is -- EDF has a big Buffett haircut in the post deal valuation.  Plus, CEG's fairness opinion doesn't include a big cash sale of 1/2 the nuclear assets.  I would put the net of those at about $1 billion.

So we need to figure out if the Fairness number more accurate then the EDF number and by how much.

A key number is the valuation of BG&E at $4 billion.  Reasonable or optimistic as hell?  I'll save that for another post.

CEG is Talking to EDF -- Facilitating but not Encouraging

Today was a nice win for the CEG's badly mistreated shareholders.

The Stock went X Dividend, and every 47 cents counts these days.

Also, the board authorized discussions with EDF.  This is an interesting development, since it was clear from the proxy that CEG's board is limited regarding the extent to which it can "initiate, solicit, facilitate, or encourage merger proposals."  It isn't initiating or soliciting merger proposals, but it is facilitating one by authorizing discussions. 

The Mid American proposal must also get a shareholder vote before the deal can be terminated by CEG.  Upon termination, Mid American gets the $275 breakup fee and 16.7% of the stock (via issuing another 20%) -- and it sounds like Mid American can only keep 10%, requiring the additional shares to be paid out in cash.  Giving Mid American 10% of the stock and over 1/2 billion in cash.

But, it looks like it is Mid American can now consider the EDF proposal and if it can work something out, terminate the Mid American agreement.  Mid American, for its part, sounds like they *could* argue that the discussions allow it to terminate with prejudice and demand the cash/stock.  It isn't obvious from a casual reading exactly how an alternative proposal can be handled without Mid American having the right to terminate, we can see where this is going in practice.

That is, CEG is going to discuss EDF's proposal.  They will then either deem it a superior proposal and change their recommendation or not.  If they change their recommendation and Mid American insists on a vote, then if it is voted down, the deal is terminated.

In practice, the CEG board really calls the shots, since they should be able to get the votes to approve whatever they recommend.  

Here's the press release:

Constellation Energy Board Authorizes Discussions With Électricité de France (EDF)

BALTIMORE, Dec 08, 2008 (BUSINESS WIRE) -- Constellation Energy (NYSE: CEG) today announced that its Board of Directors has authorized the company to begin immediate discussions and exchange of information with Électricité de France (EDF) related to EDF's unsolicited proposal, which was received on Dec. 2, 2008.

Constellation Energy said the decision to begin discussions with EDF was made following consultation with its legal and financial advisors, and in a manner consistent with its fiduciary responsibilities to shareholders, as well as its responsibilities under its definitive merger agreement with MidAmerican Energy Holdings Company.

Constellation Energy's Board of Directors has not withdrawn, modified or qualified its recommendation that shareholders of Constellation Energy vote in favor of the merger with MidAmerican. The special meeting of shareholders to vote on the merger with MidAmerican remains scheduled for 8 a.m. on Dec. 23, 2008.

The WSJ Does Some Reporting

After yesterday's critical article, it looks like the Wall Street Journal decided to actually hunt for some primary sources that know more then the fact that an industry analyst is supposed to have an opinion -- even if they haven't bothered to read the SEC Documents.

Here is probably a little more then "fair use" of a damn good WSJ piece.

PARIS (Dow Jones)--Electricite de France SA (1024251.FR) is confident that 20 of Constellation Energy Group Inc.'s (CEG) biggest investors share its view that the bid by Warren Buffett's MidAmerican Energy Holdings Co. for Constellation grossly undervalues the U.S. utility, a person close to the French company said Friday.

EDF is offering $4.5 billion for a 50% share of Constellation's nuclear assets whereas MidAmerican is offering $4.7 billion for the whole company. EDF has a 9.5% stake in Constellation, with which it has a joint venture to build nuclear plants in the U.S.

The person, speaking on condition of anonymity, said EDF and the investors that share its view hold around 50% of Constellation's equity. EDF's 9.5% stake cost the French state-controlled utility around $1 billion, the person said.

EDF and its bankers have had no contact with MidAmerican in recent weeks, the person also said. EDF expects the Constellation board to assess EDF's binding offer, which it says values the company at $52 a share, "objectively." The board has already accepted MidAmerican's offer of $26.50 a share when it was on the brink of collapse because of a liquidity crisis.

The person said EDF's offer is good value as it stands, based on conservative market benchmarks. That's before taking into account other factors such as extending the life of Constellation's relatively modern and efficient nuclear reactors, as well as the new nuclear plants it hopes to build, he said.

The person said that when MidAmerican made its bid in mid-September, EDF and its private-equity partners at the time weren't immediately able to come up with a competing, binding offer.

Regarding EDF's agreed GBP12.5 billion takeover of British Energy PLC (BGY.LN), the person said EDF is close to refinancing half of the GBP11 billion syndicated loan it has secured for the bid. EDF will launch a EUR2 billion bond, a CHF1 billion bond and a GBP400 million bond in December.

The refinancing will lower the cost of the British Energy transaction and relieve pressure on some of the banks in the syndicate.

-By Paris Bureau: Telephone: 33 1 4017 1740

Mainstream Press / Analysts Don't Get It

Per the Wall Street Journal, the EDFI deal presents a number of hurdles.  Let's look at at some of the assertions.

First, Andy Baker:

Constellation shareholders are scheduled to vote Dec. 23 on whether or not to approve MidAmerican's offer. That meeting could become critical to EDF's proposal, said Andy Baker, special situations trading strategist for Jefferies & Co.

Constellation Energy said Wednesday its board would review the offer "as soon as practicable." The company also said it hasn't withdrawn, modified or qualified its recommendation for its shareholders to vote in favor of the deal with MidAmerican.

Baker said a vote against the buyout would show support for EDF's proposal

However, if you read the prospectus, you will notice that EDFI had agreed last summer to vote its shares with the board. The 9.5% EDFI ownership plus shares controlled by the board would amount to about 20% of the shares.

Anyone that would have voted yes to the proposal would have been well advised to sell this week at $28/share. Why vote for a proposal that is LOWER then the current share price?

The prospectus describes the mechanism which would result in the board NOT recommending the Mid American Proposal. In summary, if the board is presented with a "Superior Offer" and it has a duty to shareholders to recommend that proposal, the change in the board's recommendation triggers MidAmerican's termination compensation.

At that point, MidAmerican has the right to submit a counter proposal within five days, or walk with its generous compensation of a breakup fee, 10% of the stock, about 1/2 billion cash, plus conversion of the 8% preferred to a 14% senior note due Dec 31, 2009.

Realistically, the vote doesn't particularly matter. The key is the recommendation of the board. Which should include input from the larger stock holders and institutions.

Then,  Les Levy weighs in with the insight:

But shareholders could see the continuation of Constellation, even with EDF's infusion of capital, as a more risky proposition than $26.50 a share cash offer, said Les Levy, a merger and arbitrage analyst for ICAP Corporates.

I'm wondering why Les didn't consider the wisdom of anyone preferring a certain $26.50 buyout to simply sell for $28 or higher. Maybe ICAP's arbs would rather wait 9 months for $26.50 (plus a buck and a half dividend), deal with uncertainty, instead of simply selling for $28 (plus) over the last two days. 

Then the Journal finds a skeptical analyst:

Also, questions remain about the value EDF puts on the deal. Deutsche Bank analyst John Kiani maintained a $30-a-share price target for Constellation in a note to clients Wednesday, writing he isn't convinced the implied price of $52 a share EDF claims is correct.

If the offer is between $26.50 and an implied valuation of $52 -- I would expect something more then "not convinced."  EDFI didn't just create the $52 out of thin air.  They go through a reasonably straight forward valuation that seems both solid and in some respects conservative.   The details of the valuation are available in an attachment to the offer letter[see annex a].  I would like to know which assumptions that John finds unconvincing and his alternative analysis that would lower the valuation to the extent that $26.50 seems superior.

Moody's weighs in its own questions in another short Journal piece:

Additional clarity is needed on EDF's offer to assess its impact on Constellation's credit rating, but initial information on the company's liquidity may result in an investment grade rating, Moody's said.

I can understand Moody's being cautious given the severe criticism it has received following its massive failure to anticipate the risk in billions of CDO's containing sub prime mortgages. However, it is hard to see how a few billion dollars in increased liquidity would be grounds for DOWNGRADING CEG.  It's comforting to know that billions of dollars of added liquidity might prevent a downgrade.

Given the reputation of Mr. Buffett, I am sure that his ownership of 20% of Moody's has no impact on their rating decisions.  However, this is a situation where Moody's might consider the appearance of objectivity by exhibiting extreme caution regarding their comments on competing proposals involving Mr. Buffett.

In addition, one of the reasons that CEG was forced to take Buffett's tough offer was the extreme time constraints that CEG was dealing with.  Moody's was inadvertently a contributor to some of the problems.  

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.

CGE was desperately trying to raise capital, and got cooperation from S&P. However, Moody's had already made a determination to downgrade two notches, was unable to discuss it's decision until the next morning, and refused to comment on the impact of CGE's obtaining an additional $500 million in capital in any event. I suppose that Moody's was under a great deal of pressure, but their inflexibility compared to S&P, delayed a potentially critical injection of $500 million in capital.

Moody's had essentially signed a death warrant on CEG, and was unable and unwilling to discuss remedies that could have allowed the company to maintain its independence. As the 3Q financial statements of CEG showed no significant trading losses, the entire issue was driven by a rating change triggering collateral calls. Moody's had gone from selling what amounted to indulgences on CDO deals to a guillotine happy Committee of Public Safety.

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.