On Tuesday morning, Exelon Corp. (NYSE: EXC) had its $6.8 billion offer for Pepco Holdings Inc. (NYSE: POM) rejected by the Washington, D.C., Public Service Commission. The Federal Energy Regulatory Commission (FERC) and regulators in Delaware, Maryland, New Jersey and Virginia already had given the deal a green light. However, the District of Columbia is the home-base for Pepco, and its regulators were the last ones from whom approval was required before the deal was done. As a result, a key analyst weighed in on this situation.

After talking to management and spending more time in its model, Credit Suisse continues to see compelling value in Exelon shares. The 7% sell-off for Exelon was partly a function of a bad day for the group but effectively implies that the full accretion from Pepco in 2017 was already in Exelon’s share price without giving any credit for what would otherwise be about $3.5 billion of buybacks. The firm appreciates the rehearing process will leave some near-term uncertainty on strategy, but either outcome — closing on Pepco or using the cash on hand for buybacks — is additive to Credit Suisse’s existing earnings estimates, with the low case up by $0.10 of EPS in 2017 through buybacks, or something more like $0.20 with the closing of the acquisition.

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According to Credit Suisse in its report:

Compared to our prior estimates with no benefit for Pepco or buybacks, we are now setting our baseline assuming no Pepco, but with buybacks updating our 2015-18 estimates to $2.48 (from $2.54), $2.55 (from $2.50), $2.74 (from $2.64), and $3.20 where the buybacks add $0.05 to 2016 and $0.10 to 2017+ and come before any uplift from the transition auctions impacting 2016-18 estimates. In the most simple of terms, Exelon offers a 4% dividend yield and trades on consolidated P/E for 2015-18 at 12.3x, 11.9x, 11.1x, and 9.5x which seems cheap given a strong case for higher power prices and transition auction results.

Ultimately, closing Pepco is clearly uncertain after the D.C. Commission’s comments and vote. Seeing the actual order (by the end of day Wednesday) hopefully will provide some perspective on whether there is an opening for additional concessions. Credit Suisse said that it does not know how to measure whether D.C. can be swayed, but it noted that the existing merger agreement does terminate on October 28, so the time to clarity on Pepco does offer a not-so-distant end date.

Consequently, Credit Suisse has an Outperform rating for Exelon with a price target of $39, implying upside of 28.3% from Tuesday’s close.

Shares of Exelon closed Tuesday down nearly 7%, at $30.40 in its 52-week trading range of $30.37 to $38.93. They were up more than 2% to $31.10 early Wednesday. The stock has a consensus analyst price target of $37.25.

Pepco shares closed Tuesday down 16.5% at $22.51 and were up fractionally after the opening bell on Wednesday. The stock has a consensus analyst price target of $27.19 and a 52-week trading range of $21.61 to $27.65.

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