Street Capitalist: Event Driven Value Investments

Even though I’ve mostly been posting about AIG (NYSE:AIG) and their impending liquidation and business line sales, one interesting situation that I monitored was Constellation Energy (NYSE:CEG). The Lehman Brothers bankruptcy had a highly negative impact on CEG’s stock because the company had received $150 million in financing from Lehman. I thought the situation was weird because in the context, that amount of debt is small. $150 million when the overall package was for $2 billion. The stock subsequently dropped 60% as a result of market jitters over what would happen to the company.

Today though, it’s been announced that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) is acquiring CEG. Berkshires subsidiary MidAmerican Energy Holdings is doing the deal, and for all cash.

DES MOINES, Iowa & BALTIMORE, Sep 18, 2008 (BUSINESS WIRE) — MidAmerican Energy Holdings Company and Constellation Energy today announced the companies have reached a tentative agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. The companies expect to enter into a definitive merger agreement by close of business, Sept. 19. Upon signing a definitive merger agreement, Constellation Energy will issue $1 billion of preferred equity yielding 8 percent to MidAmerican…

“We strongly believe this transaction is in the best long-term interest of our investors, employees and the customers and communities we serve,” said Mayo A. Shattuck III, chairman, president and chief executive officer for Constellation Energy. “The financial services sector and energy commodity markets have witnessed unprecedented volatility. Backed by the significant industry expertise and financial stability of MidAmerican and Berkshire Hathaway, Constellation Energy will build on its reputation as a first-choice energy solution provider for our many customers.”

“MidAmerican has been a wonderful steward of its energy assets and the acquisition of Constellation Energy, when completed, will prove beneficial to all constituents,” said Warren E. Buffett, chairman, Berkshire Hathaway.

MidAmerican Energy Holdings Company Reaches Tentative Agreement to Acquire Constellation Energy (Market Watch)

MidAmerican’s purchase price of $26.50 per share seems like a good deal. Only a week ago the company traded at $60! This just shows you the fragile nature of leveraged companies operating in a market that lacks liquidity. Any adverse move to their financing, even small amounts, can put the whole company in jeopardy:

The business relies heavily on its ability to access financing, which is highly sensitive to Constellation’s credit-worthiness. While Constellation has a credit line of $150 million with Lehman Brothers Bank, it also has about $2 billion in other liquidity available, according to the SEC filing.

Still, some analysts pointed to credit concerns exacerbated by recent market turmoil.

Constellation “remains under significant pressure [yesterday] as investors remain concerned about the company’s potential loss of access of liquidity and the potential evaporation of trading counterparties for its commodity business in the wake of financial market turmoil,” JPMorgan analyst Andrew Smith wrote in a research report yesterday.

He noted that increased costs to insure Constellation’s debt also may be adding to liquidity concerns.

Constellation stock falls 36% on vague fears about financing (Baltimore Sun)

The Constellation acquisition may be the first of many for Buffett during this crisis. His strategy may be to simply buy good companies in safe industries (non-sub prime) that were affected negatively by financial factors rather than economic factors. Buffett has a huge advantage over corporate acquirers because unlike them, he’s able to complete deals in a much faster time frame than corporate boards. That, combined with Berkshire Hathaway’s enormous cash horde, really makes this Buffett’s market.