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Hello Fools,

A couple of things this morning.

First, CEG filed an investor presentation yesterday discussing the merger progress with MidAmerican, and talked about the dire straits they would have been in had MidAmerican not made their offer. There was also a good synopsis of the pre-merger landscape for CEG, and the steps that led to the MidAmerican bid:
http://www.sec.gov/Archives/edgar/data/1004440/0001104659080...

Some highlights:

* Transaction with Mid American is the best alternative for shareholders

* Unprecedented turmoil in financial markets creates serious concerns about the stability
of Constellation Energy (Jim Note: There's a maudlin joke to be made there about
being "Built to Last")

* Without MidAmerican's $1B preferred stock injection in late September, a
Constellation bankruptcy filing was probably imminent.

* Market conditions continue to deteriorate making consumation of the transaction
even more critical.

* Failure to approve the merger could result in material challenges for continued
business operations.

* MidAmerican is committed to closing the merger with CEG
- Invested $1B cash (that aforementioned preferred) in conjunction with the
merger agreement
- Provided up to $350MM of additional liquidity resources
- Working closely with regulators and communities to gain approval.

* Merger expected to close in Q2-09.


There was also (on Slide 17) a spelling out of what would happen in the event of a failure of the merger (by non-approval by shareholders):


* That $1B preferred would immediately convert to $1B of 14% senior debt, with a 1-year
maturity.

* The MidAmerican $350MM supplementary liquidity resource would immediately
terminate.

* CEG would have to pay MidAmerican $593MM cash, and issue to them about 10% of the
outstanding stock of CEG (~20MM shares)


Now the terms above make it very, very, difficult for another suitor to take CEG from MidAmerican. Or rather, it would take a heck of an offer to be able to pay a suitably higher price for CEG so as to make taking on those onerous terms above a reasonable thing to do for any potential acquirer. Basically, any acquirer would need to outbid MidAmerican's $4.7B offer, by at least $1.6B just to cover the liquidity hit that would result in MidAmerican stepping away...forgetting the fact that they'd also have to line up that supplementary liquidity resources that CEG themselves said that without - it's probably bankruptcy filing.

But wait....what's that I hear?

Could it be that someone is actually willing to step up and take on these terms?

Yes, just this morning Électricité de France International (EDF) who already own 10% of CEG, and who have already had one offer (higher than MidAmerican's) rebuffed are at it again.
http://www.sec.gov/Archives/edgar/data/1004440/0001144204080...

This new offer is for:

* 50% ownership in the nuclear generation/operation business - for $4.5B.

* An upfront $1B cash injection for nonconvertible, cumulative, preferred
stock (so as to take out Buffett and the boys). Note that this $1B is NOT in
addition to the aforementioned $4.5B - it's merely the first 'payment'

* A $2B "put option" allowing CEG to sell non-nuke generating assets (**cough** coal **cough**)
to EDF.


So presumably, the put option and the EDF preferred give the company sufficient liquidity to make paying off MidAmerican a viable option.

Existing CEG shareholders would still have their CEG shares - just now with a tonne of cash backstopping it (assuming the put option is fully utilized) - so presumably any upside to CEG stock would then accrue to existing shareholders (something that the MidAmerican deal expressly does not provide).


However, we're, of course, interested in the debt portion of CEG. This deal - upon my first cursory reading of the documents - doesn't portend any problems with the exchange-traded debt. The hypothetical non-MidAmerican company will still be more than able to service it.

However, the thesis here is that CEG (and by extension, CEG-PA) would be taken under the safe umbrella of MidAmerican and good old uncle Warren (i.e. backstopped if need be by the balance sheet of Berkshire Hathaway). If EDF wins the day, that part of the thesis obviously falls away. Though I'd expect initially that CEG-PA will likely trade up closer to its par value once any deal goes through - I'd rather have my ultimate backstop be Berkshire, rather than EDF. So we'll have to re-evaluate at that time.

The pre-market trading with CEG now north of $30 seems to suggest that they either expect the EDF to be embraced by CEG, or that MidAmerican will come back with a new/higher offer. (And remember - were they to do so, EDF would benefit, as they hold 10% of the shares of CEG right now). I hope no one is counting on MidAmerican to do so, however. If you've ever read anything about Buffett, you'll know that he's not big on 'forced' negotiations, he's not afraid to walk away from deals, and he generally takes a dim view of executives who "deal shop". If CEG does respond favourably to the EDF offer, I would hope they're comfortable in their decision - since once spurned, Buffett would be unlikely to make a second offer if the EDF deal hits a snag.

(And frankly, my opinion of the folks running CEG is such that there's a not small part of me that's wondering if they'll make cooing noises at EDF now as it would presumably allow them to keep pulling a fatter paycheque than it would from a MidAmerican owned/operated CEG - after all, my opinion is that CEG is only in the mess that they're in, because management decided to emphasize trading profits which fattened their personal wallets. But perhaps I'm too cynical).

It will be interesting to watch the action in both CEG and CEG-PA over the next few days to see if they point in the same direction.

We'll be watching.

Jim
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