Investments in clean energy have gained momentum with growing demand from investors, naturally compelling clean energy firms to expand their businesses.
Recently, Exelon (NYSE: EXC), one of the largest operators of nuclear plants in the U.S., finally got the opportunity to grow as a larger enterprise. Let's get a better insight of its expansion.
What's popping up?
Last week, Exelon announced an agreement to buy Baltimore-based Constellation Energy (NYSE: CEG) for $7.9 billion. The all-stock deal will see shareholders of Constellation Energy receiving 0.930 shares of Exelon common stock in exchange for each share of Constellation held. After the merger, shareholders of Exelon will be holding 78% of the combined entity, while the remaining portion will be held by Constellation's shareholders.
After it failed to acquire firms such as Public Service Enterprise Group (NYSE: PEG) in 2006 and NRG Energy (NYSE: NRG) in 2009, Exelon has been eyeing an acquisition that would help it move aggressively on the clean energy front. The purchase of Constellation would satisfy that hunger as the entity formed after the merger would become the cleanest power generating group in the U.S. The new power generating fleet will consist of about 55% nuclear energy, 24% natural gas and 8% renewable energy.
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 (NYSE: DUK) to buy Progress Energy (NYSE: PGN), which would create the largest energy firm in terms of enterprise value, that of $65 billion. And the same will happen with Exelon after the takeover of Constellation, when the merged entity will become the second largest energy firm in the U.S. with an enterprise value of $52 billion.
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.
Managing redundancies
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.
Hardships
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.
