Constellation Energy, Exelon Corp. to merge in $7.9 billion deal

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If Exelon Corp. is successful in its acquisition of Constellation Energy Group Inc., Baltimore could become a hub of energy trading and benefit from the addition of jobs, but it would come at a cost — the loss of the city’s only Fortune 500 company headquarters.

On Thursday, the boards of directors of Exelon and Constellation signed off on an all-stock deal valued at $7.9 billion. Under the terms of the deal, Constellation shareholders would get 0.93 shares of Exelon for each share of Constellation. Based on Wednesday’s closing price of Exelon’s shares, Constellation stockholders would receive shares valued at $38.59, an 18 percent premium.

The deal is expected to close in early 2012, and if completed, Exelon shareholders would own 78 percent of the company with Constellation shareholders owning the rest. The deal requires approval from shareholders and regulators at the federal and state levels.

The new company would keep the Exelon name and the headquarters would remain in Chicago. The Constellation name would live on in the new company’s power marketing and retail and wholesale businesses, which would be headquartered in Baltimore. The companies’ renewable energy businesses would also be consolidated and be based in Baltimore.

Constellation’s regulated utility, Baltimore Gas & Electric, would also keep its name and headquarters, but would become a subsidiary of Exelon.

“We believe this brings a whole new growth engine to the Baltimore community,” Exelon CEO John W. Rowe said.

The new company will be led by current Exelon President and Chief Operating Officer Christopher M. Crane, who will be the CEO. Constellation CEO Mayo A. Shattuck III will serve as executive chairman, and Rowe will retire after the deal is completed.

Experts approved of the deal, especially for what it brings to shareholders of Constellation.

“We think it’s a very good deal for Constellation shareholders,” said Travis Miller, an analyst with Morningstar Inc., in Chicago. “But, it’s a very poor deal for Exelon shareholders.”

Shares of Constellation closed at $36.26, up $1.96, a 5.7 percent increase. Exelon’s shares gained 69 cents, or 1.7 percent, to close at $42.18.

To help ease the sting of losing a corporate headquarters, the deal includes a package of investments in the state that the companies said amounts to $250 million. This includes a $100 credit to each BGE customer within 90 days of the deal closing. BGE would see no impact on employment for two years, and the companies agreed to keep charitable giving at $10 million a year for a decade after the close of the deal.

Baltimore Mayor Stephanie Rawlings-Blake said the deal will mean more jobs for the city since the combined company’s biggest growth area — the power marketing, retail and wholesale businesses — would be based in Baltimore.

Donald C. Fry, president and CEO of the Greater Baltimore Committee, said it was a positive sign that the deal would bring the renewable energy and power trading businesses to Baltimore.

“New growth industries and new construction are always a plus to the economic and job creation future of a community and serve as a sign of growth and progress,” Fry said in a prepared statement. “The bottom line is that a major employer and corporate leader in Baltimore is evolving to its next stage of growth.”

Shattuck said the combined units in Baltimore would need a larger space than the company’s headquarters along Pratt Street off the Inner Harbor has to offer.

A new office for the company would either be built or significantly renovated to meet green building standards. But, Shattuck said, the location would remain within Baltimore.

“We’re committed to the city,” Shattuck said.

Anirban Basu, CEO of the Sage Policy Group, a Baltimore-based economic and policy consulting firm, said while creation of jobs is always welcome, moving a corporate headquarters out of the city can have a ripple effect. Basu said one area that can be affected is who the company does business with, and where.

“A firm headquartered in Baltimore is more likely to hire an accountant in Baltimore, or bank with bankers in Baltimore,” Basu said. “The loss of another corporate headquarters makes it more likely that business won’t take place in Baltimore — that’s the harm.”

Basu said the loss of Constellation also underscored a recurring theme of businesses in Baltimore being acquired by others outside the city. He pointed to previous sales of institutions like Alex. Brown and Sons and USF&G, which changed hands and saw corporate headquarters leave the city.

“I am really looking forward to when this generation of corporate leaders in Baltimore retires — what they have been very adept at is selling off companies,” Basu said. “They have not created anything like a Microsoft, Sun MicroSystems or an Apple. What they have managed to do is to sell off Baltimore’s most historic and profitable companies.”

Third time’s the charm

The Exelon deal marks the third time in six years that Constellation has tried to sell itself. In 2006, a merger with the Florida Power & Light Co. fell through after significant pushback by elected officials.

In 2008, Constellation was beset with credit concerns and saw its stock and market value plummet and the threat of bankruptcy was even a potential outcome. A deal was quickly enacted to sell the company to Warren Buffet’s MidAmerican Energy for $4.7 billion. But that deal was called off after Constellation agreed to what it considered a better offer from Electricite de France, which bought 49 percent of Constellation’s nuclear business for $4.5 billion.

“Over the last five years, Constellation has consistently been in the market to grow its business, and the easiest way to do that is with a merger,” Morningstar’s Miller said.

Exelon and Constellation officials said they are optimistic the deal will be successful. In a conference call with analysts on Thursday, Rowe said the Constellation deal was thoroughly examined and the companies were optimistic it made sense and had a good chance of passing regulatory and shareholder approval.

“We are confident we can execute this deal,” Rowe said.

“This one is going to work.”

If the deal falls through, breakup fees would amount to $200 million for Constellation and $800 million for Exelon. The agreement includes provision excluding breakup fees if regulators nix the deal.

Farewell to coal?

The proposed deal will also alter Constellation’s electric generation footprint in Maryland. The companies plan to sell the three coal-fired power plants that Constellation owns — Brandon Shores and H.A. Wagner and C.P. Crane.

The plants, along with Constellation’s Calvert Cliffs nuclear plant, make up the backbone of the state’s generating capability. Together, the plants, which have been outfitted to meet Maryland’s clean air legislation, can generate 2,648 megawatts of electricity.

“Those are valuable assets,” Exelon’s Crane said.

But with stringent federal air pollution regulations looming, the demand for coal-fired plants is not strong.

“We really don’t think the companies will get top dollar for those plants,” Miller said.