Warren Buffett Won't Fight the French For Constellation Energy

Constellation Energy's Nine Mile Point Nuclear Station in Scriba, New York.
Constellation Energy Group Photo
Constellation Energy's Nine Mile Point Nuclear Station in Scriba, New York.

The chairman of Warren Buffett's MidAmerican Energy Holdings tells CNBC it won't try to outbid France's EDF in the battle for Constellation Energy .

In a statement to CNBC's Becky Quick, David Sokol says today (Tuesday): "We will not counterbid .... The structure of the transaction (that Électricitié de France has proposed) is not one we would be comfortable with."

Back in September, at the height of the credit crisis, MidAmerican reached a tentative agreement to throw Constellation a billion-dollar lifeline as part of a deal to purchase the entire company for $4.7 billion in cash. It looked like a typical "Buffett bargain."

Then, earlier this month, Électricitié de France responded with an offer to pay $4.5 billion for just half of Constellation nuclear business. EDF said that valued the entire company at roughly double what Buffett & Co. had agreed to pay.

So, it was no big surprise when Constellation's board authorized talks with EDF about its offer.

It's also not a big surprise that Bloomberg is reporting EDF is "close to an agreement" with Constellation and Reuters says Constellation is "leaning towards" a deal with the French company.

And it's certainly not a surprise at all that Buffett doesn't want to get into a bidding war.

As we pointed out just about two weeks ago in the WBW post Why Fight When You Can Take the Money And Run?,Buffett's deal with Constellation includes some big break-up penalties, including almost $600 million in cash, 10 percent of Constellation's common stock, and a 14 percent payback for MidAmerican's billion-dollar cash infusion.

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But don't be surprised if this isn't the end of the story. The reports say an EDF-Constellation deal would require waivers for some bank covenants. The Baltimore Sun's Jay Hancock says that refers to Constellation's month-old $1.23 billion line of credit with UBS and Royal Bank of Scotland. As a condition of the loan, Constellation isn't allowed to sell or transfer any assets to an unrelated third party. Hancock writes, "There are exceptions for ordinary-business asset sales, but the EDF deal ... doesn't seem to fit the exceptions."

And an EDF deal would require approval from the U.S. Nuclear Regulatory Commission. It wants to be sure nuclear plant safety issues are handled by a "U.S. entity."

While a foreign company is not allowed to take full ownership of a nuclear plant, EDF is only buying half of Constellation's nuclear assets and promises to have U.S. citizens overseeing nuclear and security issues.

That could be enough to win NRC approval, but it's not necessarily a slam dunk.

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