There is nothing like having cash available when good products go on sale. Warren Buffett made what may go down in history as one of the best purchases of his long and distinguished career yesterday when he beat out EDF in a bid to purchase Constellation Energy Group for $26.50 per common share in cash and stock. That valued the company, which owns 8,700 MW of electrical generating capacity, at just $4.7 billion.
Throughout the summer of 2008, Constellation was trading above $80 per share, and I thought it was a great deal when it dropped to $70 per share. After the credit crisis hit, the market felt differently, not because of the electricity generating part of the business, but because of the energy trading arm. That business requires access to credit to finance the trades; when credit dried up the market got very worried and sold so many shares that the company’s stock price dropped to about $23 per share almost overnight.
Anyone who has ever read much about Warren Buffett knows that the man likes to buy companies on sale. The companies have to be ones in businesses he understands and with management teams that can actually run the company and take advantage of the financial stability that he can bring, Obviously, Constellation met his criteria.
With the stroke of a few pens, there is now an answer to the utility industry’s question of how relatively small companies like Constellation Energy can finance large investments in new nuclear power plants. With Buffett’s capital base in the picture, even the energy trading arm of the business should flourish.
I posted a comment on a Wall Street Journal Environmental Capital Blog post titled Buffett’s Bet: Constellation Deal Shows The Billionaire Likes Nukes. One of the points that Keith Johnson made in his post was that the purchase of Constellation provided a different view of Buffett’s opinion of nuclear power than his recent decision to stop plans to build an EPR in Idaho.
Here is a reprint of that comment:
Mid-America’s learning experience in Idaho has been greatly misunderstood. The decision not to build a plant there should never have been interpreted as a vote against nuclear power in general, just as a vote against building a new, single reactor plant on a greenfield in Idaho.
Idaho has a very small electricity market inside the state. The plant proposed would have exceeded Idaho’s demand by itself. The distances to large markets would have made transmission lines a large portion of the investment. Because of its small market and access to low production cost fuels, Idaho also has some of the lowest price electricity in the country.
Check that – according to the Energy Information Agency Electric Power Monthly – as of April 2008, Idaho’s average sale price is the LOWEST in the nation at 5.39 cents per kilowatt hour. That is even lower that Wyoming with its mine-mouth coal plants!
No wonder Mid-America decided that it was not the right place to build a 1600 MWe nuclear plant.
However, that $13 million dollar study program was not wasted; Buffett rarely wastes money. I would bet a good sum of money that all of the data gathered was carefully entered into spreadsheets and recorded in well-organized reports.
Based on my own experience and numerous discussions with people at EDF, Areva, Bechtel and Constellation, one of the things learned was that the Constellation-Areva-Bechtel partnership called Unistar has some very talented people who are working with some excellent technology.
When the opportunity came to buy a major part of that partnership for a song, Buffett, always interested in good value and good teams to run the companies he purchases, moved very quickly.
It should be remembered that Constellation was selling for $80 per share – nearly 3 times as much as Buffett paid – just a about a month ago. Its big negative in our current market was its large energy trading business which depends on ready access to credit. That dried up, but something tells me that Buffett does not have that worry.
Bottom line – Buffett has a very long history of buying good companies in businesses he likes and understands at prices that undervalue the company. That is why he is such a successful investor.
Publisher, Atomic Insights