Investments in clean energy have gained momentum with growing demand from investors, naturally compelling clean energy firms to expand their businesses.
What's popping up?
Last week, Exelon announced an agreement to buy Baltimore-based Constellation Energy
After it failed to acquire firms such as Public Service Enterprise Group
But investors would be eager to see beyond the obvious: What enticed Exelon to merge with Constellation? Let's interpret the reasons behind the takeover.
Benefits from Constellation
One major concern among electric power firms is cost efficiency. In order to reduce costs and increase margins, these firms have started acquiring other energy providers to create economies of scale.
The beginning of 2011 has already seen an attempt by Duke Energy
Constellation provides energy services to more than 30,000 customers. This will be an advantage for Exelon in terms increasing its customer base, thereby boosting its sales.
According to the agreement, the Constellation brand will embrace the executive power team of Exelon, as well as the wholesale and retail businesses of Constellation. This new entity will be operated from Baltimore, where Constellation has an upper hand. The sales and marketing skills of Constellation will give Exelon the thrust to expand its business around the world.
Apart from the marketing strategy, combining with Constellation will help Exelon raise its investing capacity. The new enterprise, larger in market share, will provide Exelon an impetus to invest more strategically following the marketing platform. However, this deal, like other energy deals, is not free from challenges.
The Exelon-Constellation combination will make it a potential leader in the clean energy market. However, the increased market value of the new enterprise has increased the likelihood of regulation by authorities to curtail competitive and antitrust concerns.
To mitigate regulatory concerns, Constellation has planned to sell off three power plants in Baltimore after the closure of the deal in 2012. Divestiture of these plants is also a step toward mitigating the environmental concerns as these plants use coal as fuel. Well, this will definitely help the new enterprise to establish its clean energy business in accordance with the regulatory norms and will surely reduce the frequency of regulatory oversights.
Exelon is also facing the same hardships in Maryland as earlier attempts to acquire Constellation were blocked by officials there. In order to address those concerns, Exelon has offered an incentive package worth $250 million for Baltimore, which includes credit of $100 for the customers of Constellation's electric and gas unit in Baltimore. Let's see how this package helps Exelon to get the deal approved by the state authorities.
The Foolish bottom line
This takeover looks a long-term strategy for Exelon to fortify its business in the clean energy sector. I feel the deal will raise competition in the industry, which would boost the manufacture of innovative products in the clean energy sector. This seems to me like a long-term gain for Exelon.
Anupama Pattanaik doesn't hold shares of any of the companies mentioned in the article. Motley Fool newsletter services have recommended Exelon. Motley Fool newsletter services have recommended a covered strangle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.