We have had many inquiries this week over this EDF offer for Constellation Energy Group Inc. (NYSE: CEG) now that EDF in France gave a competing bid versus that of Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) unit MidAmerica.  There is more than one way this can go, but the data suggests that Warren Buffett and friends are getting the last laugh here.

Warren Buffett and MidAmerica are getting to steal the company assetsfor far less than putting these together from scratch.  If that wasn’twhat they believed to be the case then they wouldn’t be doing the deal.  The problem is that even ifit is a steal, they were the only ones who really came in whenConstellation was arguably on the verge of collapse.  That $4.7 billiondeal values Constellation at $26.50.  It isn’t a great deal for buriedshareholders, but it is a bird in the hand.

But the $4.5 billion offered by EDF for 50% of the Constellationnuclear assets sounds so much better on the surface.  Then there is anoption for $2 billion of non-nuclear assets.  This sounds like two birds in the bush.  Unfortunately there is a catch more than just making a higher bid that isn’t for the whole operation.

The problem with the higher deal is that the costs to implement itmight just be far too high too implement.  We have seen differentcalculations and tried to pull the back data.  If Constellation takesthe second bid, it will have to fork over nearly $600 million and issuea stake of almost 10% of common stock.  But Warren left another Holy Hand Grenade of Antioch in the reactor here.  MidAmerican would also geta $1 billion senior note with a 14% rate attached.

Constellation has already mailed a definitive proxy to shareholderssupporting the $26.50 per share bid from Warren Buffet’s BerkshireHathaway.  MidAmerican also made injections (hence that senior note) despite EDF already owninga large stake.

You can see why all of the calculations that gave an "implied" valuenorth of $50.00 were just off their rocker.  Implied is one thing, buta breakdown of the money generally yields something else.

It looks like EDF may have just waited too long or not ponied up whenit could.  It could easily just go after the company in whole and payall of the penalties to MidAmerican.  But then this would be a hugepremium on top of the losses EDF already has on paper today from astake taken at higher prices.

If there was a serious shot at a significantly higher priced mergerheaded this way, then why are the January-2009 $30.00 Call Options onlytrading with a $1.00 handle?  Anything is possible, particularlytoday.  It just doesn’t seem to be that way in this case.

It looks like, once again,  Warren Buffett and friends have both sides by the shorts here.  Ask Warren if you can.  He’ll tell you a bird in the hand is worth more than two in the bush.

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Jon C. Ogg
December 5, 2008

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