Nuclear Catfight: Exelon, NRG Take Tussle Public


One of the unintended but still entertaining side effects of deflated market caps is the corporate catfight.

As of yesterday, we have a promising one being performed in the energy sector: After a few weeks of gentle pawing at smaller rival NRG Energy, industry giant Exelon has gone hostile. NRG rebuffed the $6.1 billion tender offer Exelon made last month, so Exelon CEO John Rowe responded with a polite letter that ended on an unvarnished threat:

We are fully prepared to negotiate with the new board following the 2009 NRG annual meeting of shareholders.

That’s corporate-speak for: It’s on.

You might have thought Exelon would have gotten the point from the eight-page Dear John Rowe letter its CEO David Crane sent over the weekend. Exelon’s $6.2 billion all-stock bid for NRG offered a 37 percent premium to NRG’s beaten-down stock price, so Crane needed to argue why that wasn’t attractive to NRG’s shareholders.

Crane held nothing back. He shook his head over Exelon’s “low investment grade credit rating … even though [it’s] higher than our standalone credit rating” and the “economic waste of possibly $300 million to $500 million per year” from restructuring NRG’s debt after a merger. He fretted that Exelon would throttle NRG’s plans for growth. More harshly, he openly sneered at Exelon’s nuclear-power strategy.

Our approach has been, and continues to be, to deploy the ABWR technology, the only advanced nuclear technology which has been built on time and on budget…. Exelon, on the other hand, working in the same merchant market environment as us, but at a challenging greenfield site, continues to pour development resources into an unproven design, not yet certified by the NRC, never before built and involving substantial first-of-a-kind engineering.

As such, we are concerned that you are on a path to repeat the nuclear construction experience of the 1970-80s by taking nuclear completion risk ‘on balance sheet;’ and that is a risk which, no matter how much you intend to grow your balance sheet, concerns us (on behalf of our shareholders) immensely.

You know an energy executive is fighting mad when he refers to the anti-nuke days of the 70s and 80s.

Rowe’s own response was measured in tone, if hostile in intention. His argument was focused solely on the bottom line, perhaps hoping NRG investors would shrug off the nightmarish suggestion of cavalier risk-taking in nuclear plants.

The combined company will be the preeminent low-cost producer of power in the industry, operating in the most attractive markets, and providing earnings and cash flow accretion to shareholders of both Exelon and NRG. In addition, the combined company’s balance sheet will benefit from our investment grade credit rating that will provide greater flexibility for growth and hedging while ultimately reducing the cost of capital.

Analysts, as well as NRG investor Warren Buffett, are reportedly opposing the deal as too low. NRG investors would clearly welcome a higher bid, while Exelon is clearly betting that time – along with a bear market and tight credit – is on its side. I don’t have a preference, but I’d like to ask both companies to keep sharing vitriolic letters they are penning each other.

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