Buffett's MidAmerican Energy to Buy Constellation

By Jim Polson

Sept. 18 (Bloomberg) -- Warren Buffett's MidAmerican Energy Holdings Co. agreed to buy Constellation Energy Group Inc. for about $4.7 billion, snapping up the largest U.S. power marketer at less than half its market value prior to this week.

The cash deal is worth $26.50 a share, the companies said today in a statement. That's 7 percent higher than yesterday's close. The stock plunged 58 percent this week on concern turmoil in financial markets would wreck Constellation's energy-trading business.

``That's a big haircut,'' said James Halloran, who helps manage $34 billion in assets, including Constellation shares, at National City Private Client Group in Cleveland. ``The assets are valuable.''

Constellation hired Morgan Stanley and UBS AG to explore strategic alternatives as its shares plunged this week. Lehman Brothers Holdings Inc.'s bankruptcy, the sale of Merrill Lynch & Co. and the government takeover of American International Group Inc. heightened investor concern over Baltimore-based Constellation's ``undercapitalized'' trading business, according to analyst Paul Fremont of Jefferies & Co. in New York.

MidAmerican, based in Des Moines, Iowa, and Constellation expect to complete a definitive merger agreement later today, the companies said. Once that's done, Constellation will issue $1 billion in preferred equity yielding 8 percent to MidAmerican, according to the statement.

Capital Needed

Constellation Chief Executive Officer Mayo Shattuck had been seeking a partner to share the risk in the company's wholesale energy-trading business. Shattuck, 53, told investors at a meeting last month that Constellation would sell natural- gas production assets to raise as much as $1 billion, thereby improving its ability to post collateral in its trading business.

Electricite de France SA, Constellation's top shareholder, was considering buying a larger stake or the whole company, the Wall Street Journal reported yesterday. The Paris-based power producer, which is controlled by the French government, missed out on the deal, a person familiar with the matter said prior to the announcement of the takeover by MidAmerican.

Florida's FPL Group Inc. agreed to buy Constellation, also owner of Baltimore's electric utility, for $12.4 billion in 2005. Maryland lawmakers scuttled that deal.

``Constellation has been backed into a corner and Shattuck may be willing to give up more to Maryland utility regulators to get a deal done,'' said Greg Phelps, who oversees $3.5 billion at MFC Global Investment Management in Boston.

Receptive to Sale

State regulators and lawmakers also may be more receptive to the sale to MidAmerican, said Michael Worms, an analyst at BMO Capital Markets in New York.

``Given all the concerns about Constellation's non- regulated businesses now, I'd think the regulators may be a bit more accommodative than they were back then,'' Worms said.

Shattuck became Constellation's CEO in September 2001 after 16 years at Deutsche Bank Alex Brown, departing as head of the brokerage unit and North American private banking.

Buffett built Berkshire Hathaway Inc. by investing in out- of-favor securities and buying businesses whose prospects and management he deemed superior. He disclosed a 1.4 percent stake in U.S. power producer NRG Energy Inc. in a regulatory filing last month.

Earnings from Berkshire's energy and utilities unit were $208 million in the second quarter, a decline of 10 percent from a year earlier.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.