EDF buys half of Constellation nuclear activities

The French national utility Electricité de France – EDF –  just bought half of nuclear activities of US based utility Constellation for 4.5 billion US Dollars (3.3 billion euros).

This occurs only a few months after the acquisition of British Energy by EDF, which is willing to become a major global player in nuclear energy, one of the lowest carbon emitting solutions.

EDF will manage on US soil five reactors which accounts for  nearly 4,000MW of generation capacity. This adds up to the 58 reactors already managed in France.

As the Financial Times notes :

Constellation Energy on Wednesday opted for the risks of an independent future over the certainty of ownership by US billionaire Warren Buffett after agreeing to sell 50 per cent of its nuclear business to its biggest shareholder, EDF of France, for $4.5bn.

Constellation shares fell 20 per cent to $23 on the news. EDF shares opened up 2.2 per cent at €42.26 on Thursday.

Mayo Shattuck, Constellation’s chief executive, said that after careful consideration directors had decided EDF’s offer delivered greater value for shareholders than the rival $4.7bn bid for the whole group from Mr Buffett’s MidAmerican Energy.

As well as resolving the group’s liquidity issues, the alliance with EDF “created a powerful platform to take advantage of the nuclear renaissance” in the US, he said.

However, both Moodys and Standard & Poor’s cited concerns of continuing pressures on Constellation’s liquidity, despite EDF’s $1bn cash injection, a further $600m backstop facility, and the additional option to buy $2bn in non-nuclear assets. Moody’s downgraded Constellation almost immediately to Baa3, while S&P said it remained on Creditwatch.

Mr Shattuck, however, stressed that management had held extensive discussions with banks and rating agencies to ensure the EDF deal addressed liquidity issues. “We are confident the resulting strategy is implementable,” he told the Financial Times.

Constellation will now significantly reduce expenditure and risk, abandoning upstream investments, sharing the cost of nuclear spending with EDF and slashing the dividend by 50-60 per cent.

Jonathan Thayer, Constellation finance director, estimated earnings next year at $2.90 to $3.30 a share, and said the measures would give sufficient liquidity in 2009 to meet requirements should there be further downgrades.

For EDF the deal secures its strategic position in the vitally important US market. The French company, operator of 58 reactors in France, has a 9.5 per cent stake in Constellation and a joint venture to build four new generation EPR reactors on US sites.

Mr Buffett’s bid sparked fears this partnership could be at risk. The US investor, meanwhile, stands to earn $593m, plus a 9.9 per cent stake in Constellation, in break fees and other compensation for the withdrawn recommendation.

Under Wednesday’s deal EDF will own 49.9 per cent of Constellation’s five reactors with 3,869MW of generation capacity. The reactors will be run through a new joint venture.

The French group will locate its US headquarters in Maryland, as well as contribute $36m to Constellation’s local charity, and a further $20m in a local visitor centre at the group’s Calvert Cliffs nuclear site.

JP Morgan advised EDF, while Rothschild, Morgan Stanley, Credit Suisse and UBS worked for Constellation.