by Kathleen Davis, senior editor
Most Americans know one bit of Wall Street wisdom: Don't mess with Warren Buffett. EDF, not being American, had to learn that wisdom the hard way.
The finance god and the French utility powerhouse scuffled this fall over Constellation Energy. As of press time, no definitive winner had been declared, but favor?both ethnocentric and fiscal?leans toward Buffett.
EDF's push to pick up Constellation is just the latest investment in American energy from Europe: National Grid (from the UK), E.ON (from Germany) and Iberdrola (from Spain) all have major holdings in the states, expanding their energy strongholds across the Atlantic.
A weakening dollar, an opening industry pushing past vertical integration and significant changes in technology have created the perfect template?positive return on investment, or ROI, for European money, according to various financial analysts from Merrill Lynch to Standard & Poor's.
History's merger mystery
According to PricewaterhouseCoopers' look at M&A activity in the past few years, 2006 was a good year for European investment in American utilities. 2007 actually dipped a bit when it comes to investment in the North American market, but that's not expected to stop the influx as market issues make the price tag cheaper for U.S. utility assets.
"There are a host of European companies with global ambitions who will be mindful of the opportunity presented by the current strong euro," said John McConomy, U.S. power and utilities transaction services leader for PricewaterhouseCoopers.
McConomy was also quoted in a BusinessWeek article this year noting that "the U.S. is the most opportune place for European players to expand."
European players' diving into the U.S. market is a fairly recent trend. Take National Grid and E.ON for examples. They haven't had footholds here since Edison. On the contrary, both entered the field when deregulation was the buzzword of the day, around 2000.
National Grid USA, which operates in most of the Northeast, came about when British utility National Grid bought the New England Electric System in 2000. Then Eastern Utilities Associates was folded in, as well as Niagara Mohawk Holding. These days, this little U.K. utility owns one of the largest distribution grids in America.
In the South, LG&E, a subsidiary of E.ON U.S., has origins that roll back to 1838 as Louisville Gas. In 2000, LG&E Energy was bought by British utility Powergen, which, in turn, was acquired in 2002 by E.ON. The name change for all the utilities owned by E.ON to E.ON U.S. happened at the end of 2005.
That was then, this is now
Nearly three years after that E.ON U.S. name change, we're still watching the European push into the American energy market unfold?and not just the public battle between EDF and Buffett. A very quiet, very large merger was also approved a few weeks ago between Iberdrola and Energy East.
Regulators in New York have given the thumbs up to the $4.6 billion deal where Iberdrola gets all sorts of Energy East goodies, including Rochester Gas and Electric Corp. and New York State Gas and Electric.
There were conditions, of course: Generation assets Iberdrola must put up for sale to make the commissioners happy, money it has to set aside to make commissioners comfortable. Still, it looks like a "done deal," as they say.
"This isn't a perfect deal, and it might not be a great deal," said commissioner Maureen Harris in a Sept. 4 New York Sun article on the vote. "In my opinion, it's a good deal, and I'm not willing to risk having the company walk away from it."
And they didn't. Two weeks later, Iberdrola officially announced its newest acquisition, touting it as "the largest industrial acquisition by a Spanish company in the U.S."
Iberdrola, in fact, admits that its strategic plan for 2008-2010 labels America as a "key market" for future expansion. It also expects American utility assets to contribute 10 percent of its EBITDA (earnings before interest, taxes, depreciation and amortization) within three years?also according to those objectives laid out in the strategic plan.
Had the EDF takeover of Constellation taken off, that deal would have easily topped Iberdrola's, but it looks like Buffett beat them to it.
The EDF/Buffett battle
It looked so much like a rescue: Buffett riding in to "save" embattled Constellation from its financial woes. The story starts a bit like the begats part of the Bible. You need to know that Buffett owns Berkshire Hathaway Inc., which, in turn, has a subsidiary electric company called MidAmerican Energy Holdings. It's MidAmerican Energy Holdings that's attempting to buy the 91.5 percent of Constellation to get the merger rolling.
Who owns the rest? EDF. EDF has been investing in Constellation's nuclear energy side of the business for years.
Now, here's where things get into "sticky wicket" territory. Constellation and MidAmerican announced in late September that MidAmerican would purchase all the outstanding shares of Constellation for a price of around $4.7 billion, or $26.50 per share. It was unanimous, according to both companies. And, everyone was happy.
"We strongly believe this transaction is in the best long-term interest of our investors, employees and the customers and communities we serve," said Mayo A. Shattuck III, chairman, president and CEO of Constellation Energy.
Buffett himself added, for Berkshire Hathaway, "MidAmerican has been a wonderful steward of its energy assets and the acquisition of Constellation Energy, when completed, will prove beneficial to all constituents."
OK. Not everyone was happy. EDF cried foul. EDF told anyone who would listen that Constellation Energy had turned down an offer by EDF?well, the term they used was "ignored"?that would buy the company at a much heftier $35 per share?and that they did so the day before this MidAmerican merger was announced to the world. EDF's statement added that "the MidAmerican transaction does not generate value creation expected by shareholders."
And, when that statement came to light, a few shareholders said, "Whoa. Wait? What? EDF offered more?" In a Sept. 22 Baltimore Sun article, the author claimed that some of Constellation's biggest shareholders were now protesting the Buffett merger.
And they weren't the only ones protesting. Maryland state lawmaker Patrick McDonough called the MidAmerican deal "highway robbery," but that's because he thought Constellation was worth much more than Buffett's deal and not specifically about EDF's claim.
The overall brouhaha, however, pushed Shattuck into a conference call Sept. 22 where he named the MidAmerican deal "the superior offer" and admitted that he understood that EDF is "not happy" about the developments.
Constellation got a nice infusion of $1 billion from MidAmerican the same day, as the merger continued to move forward.
But, EDF isn't out for the count. They have filed a note with the Securities and Exchange Commission about the whole mess. Then came new info: not only did Constellation reject the 33 percent higher EDF bid, it also rejected another offer by an unnamed U.S. bidder.
Despite rumors that talks are ongoing between EDF and Buffett and/or EDF and some financial backers, MidAmerican made a few regulatory filings Oct. 9 required for the merger to be completed. All that activity says that, despite EDF protests to the contrary, this Buffett bailout of Constellation will likely be a "done deal," like Iberdrola's, very soon.
For more information on the latest developments in the scuffle for Constellation, check out the news, updated daily, at www.elp.com.