Shares of Constellation Energy Group Inc, which jumped above US$61 this week on reports of a possible acquisition by Florida utility-owner FPL Group Inc, may be worth as much as US$70 each, according to a survey of analysts.
Constellation's coal and nuclear power plants, which are cheaper to run than gas-fired generators, make the company attractive at US$65 or US$70 a share, said Paul Fremont, an analyst at Jefferies & Co. Barry Abramson at Gamco Investors Corp estimated Constellation's value at US$62 to US$65 a share.
Record natural-gas and oil prices have helped spur almost US$430 billion of energy-industry mergers worldwide this year, or 38 percent more than last year, according to data compiled by Bloomberg.
"The value of their nuclear and coal units is considerably more than it was, say, six months or a year ago because of higher gas prices," said Fremont, who has a "buy" rating on Constellation shares and doesn't own any. Constellation "should not sell" for US$11 billion, which Fremont said is equivalent to US$61.80 a share.
Shares of Baltimore-based Constellation jumped 8.6 percent two days ago after the New York Times said the company was in talks to be acquired by the owner of Florida Power & Light for more than US$11 billion. The shares today rose US$0.53 to US$61.62 in New York Stock Exchange composite trading. They are up 43 percent in the past year and touched a peak of US$62.60 on Oct. 4.
FPL rose US$0.41 to US$42.95.
FPL spokesman Bill Swank and Constellation's Rob Gould both declined to comment on reports that the companies are in talks.
The Wall Street Journal reported yesterday that the boards of the two companies are meeting this weekend.
Constellation generates half its power from nuclear plants and another 35 percent from coal. Adding Constellation's plants would double FPL's nuclear holdings.
"Constellation doesn't need to put itself up for sale," Abramson said. He helps oversee US$28 billion at Gamco in Rye, New York, including investments in Constellation and FPL shares.
"They've got a strong balance sheet and good earnings growth on their own," he said.
Constellation in the first nine months of the year reported net income of US$427.9 million, up 5.8 percent. Its debt rating is Baa1 with a stable outlook at Moody's Investors Service.
In much of the US, electricity prices are set based on how much it costs to run gas-fired power plants. As gas prices rise, coal and nuclear plants become more profitable. Last year, it cost three times as much to generate power from natural gas than from nuclear or coal, according to the US Energy Information Administration. The cost difference has widened this year.
Gas rallied after Hurricanes Katrina and Rita damaged offshore production platforms, pipelines and onshore gas-processing plants in August and September. Gas output from the Gulf of Mexico remains almost 25 percent below pre-storm levels.
Higher gas prices raised the value of Texas Genco, which NRG Energy Inc agreed in October to purchase for US$5.8 billion in cash and stock. Texas Genco owns three coal-fired power plants in Texas and 44 percent of the South Texas Project nuclear station.
NRG Energy will also assume about US$2.5 billion in debt in the transaction, meaning the value of Texas Genco has more than doub-led in about a year. Four buyout firms, including Kohlberg Kravis Roberts & Co and Texas Pacific Group, bought Texas Genco from Houston utility owner Centerpoint Energy Inc in July last year for US$3.65 billion.
In addition to the Texas Genco transaction, Duke Energy Corp, the second-largest US utility owner, agreed in May to acquire Cinergy Corp for about $9 billion in stock. Also in May, Warren Buffett's utility company, MidAmerican Energy Holdings Co, agreed to buy Pacificorp for US$5.1 billion.
An acquisition of Constellation would likely be the largest utility combination since Chicago-based Exelon Corp agreed to buy Public Service Enterprise Group Inc for US$15.7 billion.
Analysts in New York said that the value of Constellation shares is limited because the company's businesses are difficult to assess.
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