Exelon-CEG Progress on Merger

Constellation Energy (CEG) and Exelon Corporation (EXC - Analyst Report) announced that the Maryland Public Service Commission or MPSC approved their merger. The MPSC's order adds new conditions, but retains many of the terms of the settlement reached in December 2011 by the companies, the State of Maryland, the Maryland Energy Administration, the City of Baltimore and the Baltimore Building and Construction Trades Council.

Per the agreement, the merger will provide a package of benefits for Maryland, the City of Baltimore and BGE customers totaling more than $1 billion and is expected to create more than 6,000 jobs statewide.

Earlier, on April 28, 2011, Exelon entered into a definite agreement to acquire Constellation Energy, for about $7.9 billion. 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 companies expect to close the merger by early 2012.

Headquartered in Chicago, Exelon is one of the nation’s largest electric utilities with approximately $19 billion in annual revenues. The company has one of the industry’s largest portfolios of electricity generation capacity, with a nationwide reach and strong positions in the Midwest and Mid-Atlantic. Exelon distributes electricity to approximately 5.4 million customers in northern Illinois and southeastern Pennsylvania and natural gas to approximately 494,000 customers in the Philadelphia area.

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

The Exelon-Constellation merger has received approval from the shareholders of Exelon and Constellation. Required regulatory approvals or reviews have been completed by the New York Public Service Commission, the Public Utility Commission of Texas, the Department of Justice, and the Nuclear Regulatory Commission.

Despite obvious positives to be reaped from such a consolidation, the deal came after both the companies showed 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 - Analyst Report) in 2008, Public Service Enterprise Group Inc. (PEG - Analyst Report) in 2004 and Illinois Power Company in 2003.

Constellation Energy came close to be acquired twice before both the deals fell through. NextEra Energy Inc.'s (NEE - Analyst Report) 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.

Constellation Energy is a leading competitive supplier of power, natural gas and energy products and services for homes and businesses across U.S. It owns a diversified fleet of generating units, totaling approximately 12,000 megawatts of generating capacity, and is a leading advocate for clean, environmentally sustainable energy sources, such as solar power and nuclear energy. The company delivers electricity and natural gas through Baltimore Gas and Electric Company, its regulated utility in Central Maryland.

In the near term, given the merger pending approval with the Federal Energy Regulatory Commission and weak numbers posted by Constellation Energy in the recently reported fourth quarter of 2011, we are maintaining our Zacks #5 Rank (short-term Strong Sell rating) on the stock. This implies that the stock is expected to perform below par the broader U.S. equity market over the next 1–3 months. We are, however, Neutral on Constellation Energy in the long term.

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