Exelon's Rowe undeterred in quest for takeovers

Exelon Corp., the largest U.S. nuclear power producer, may not wait long to find a new takeover target after dropping a $7.53 billion hostile bid for NRG Energy Inc., its third scuttled acquisition in six years.

Chief Executive Officer John Rowe "will move ahead quickly and go after someone else," said Edward Tirello, senior power strategist at Berenson & Co. in New York, who estimates that Exelon may target another power producer by this fall.

Rowe, who battled for nine months to buy NRG, needs greater scale to adjust to rule changes such as emissions limits and cope with dwindling power use and capital availability during recessions. Exelon dropped the bid for NRG after shareholders voted yesterday against its board nominees and may now target other independent, or merchant, power producers such as Houston- based Dynegy Inc., RRI Energy Inc. or Mirant Corp. of Atlanta.

"Exelon still wants to buy some merchant coal fleet to use their excess carbon credits they get under some sort of carbon legislation," said Greg Phelps, who oversees $3 billion at MFC Global Investment Management LLC in Boston. "I think they will make another move in 12 months and buy a merchant generator."

Rowe declined through a spokeswoman to be interviewed for this article. Exelon Treasurer Chaka Patterson said July 15 that Rowe is willing to walk away from a deal if the price would detract from shareholder value.

Past Deals Dropped

Bill Von Hoene, Chicago-based Exelon's general counsel, declined in an interview yesterday to say how soon the company may make another acquisition bid. He said the utility owner will look to take advantage of "standalone opportunities."

Exelon, the biggest U.S. utility owner by market value, is less than half the size of its largest peers in Europe, where the industry has had three major acquisitions in the past year.

Before losing out on Princeton, New Jersey-based NRG, the second-largest power producer in Texas, Rowe dropped a $17.8 billion purchase of New Jersey's Public Service Enterprise Group Inc. because of an impasse with regulators. In 2003, Exelon halted plans to buy Dynegy's Illinois Power Co. utility after lawmakers failed to pass a bill to make the deal viable.

While the earlier takeovers broke down over failures to come to terms with state regulators and legislators, not the sellers, investors said those cases had something in common with the proposed NRG deal: Rowe's refusal to overpay.

Focus on Value

"On one side, you can say Exelon wasn't successful in the deal but on the flip side, you can say that John Rowe and his team maintained discipline," said Thomas O'Flynn, who was chief financial officer at Public Service during the proposed takeover of New Jersey's largest utility owner. "They saw value in the deal and they also saw costs. As the cost increased, they maintained discipline and ultimately stepped away."

Had Exelon completed the Public Service merger, it may have cost the company another $1 billion, including tax costs and concessions or asset sales, to satisfy state and federal regulators, said O'Flynn, who worked as an investment banker at Morgan Stanley for 15 years before joining Public Service.

Europe has seen a wave of utility acquisitions amid efforts by the European Commission to open power and natural-gas markets. Italy's Enel SpA bought Acciona SA's stake in Endesa SA for 9.6 billion euros ($13.7 billion) in June, gaining full control of Spain's biggest producer of hydroelectric power.

European Acquisitions

In February, Electricite de France SA bought British Energy Group Plc for 12.5 billion pounds ($19.7 billion). GDF Suez SA was created through the July 2008 merger of Gaz de France SA and Suez SA. GDF Suez and Electricite de France, both based in Paris, have market values exceeding $84 billion. Exelon's market capitalization is $35.1 billion.

Germany's RWE AG agreed in January to buy Dutch utility company Essent NV for 9.3 billion euros.

Exelon canceled its proposed $425 million acquisition of Illinois Power in 2003, after state lawmakers rejected a bill that would have helped ensure adequate rates for the company to justify its investment. Ameren Corp. later bought Illinois Power.

Rowe "is not foolishly bidding for assets," said Tirello of Berenson & Co. "There is no advantage in overpaying for something because all that happens is it takes years and years to work through your system because you have overpaid and your earnings suffer and your stock price suffers."

Before today, Exelon had fallen 4.1 percent this year in New York trading, beating the 4.7 percent decline by an index of utility companies in the Standard & Poor's 500. If it finishes 2009 ahead of the index, it will have outperformed the group seven of the past 10 years.

Outperformer

Exelon fell 79 cents to $52.54 at 1:54 p.m. in New York Stock Exchange composite trading. Dynegy rose 7 cents, or 3.6 percent, to $2.02, and RRI climbed 15 cents, or 3 percent, to $5.18. Mirant fell 19 cents, or 1.1 percent, to $17.03.

Exelon has been the most profitable U.S. utility company each of the past two years, mostly on the strength of nuclear plants that are relatively cheap to fuel.

Paul Patterson, an analyst at Glenrock Associates LLC in New York, said Exelon may take time to refocus on its operations after dealing with the NRG battle. The company said June 18 that it will eliminate about 500 jobs and freeze executive salaries in response to "economic challenges."

"I would think they might have deal fatigue and will most likely focus on just running their business, at least in the near term," Patterson said.