Exelon Picked Banker Shattuck as Chairman in Bid for Lower Price

Exelon Corp. (EXC) set aside qualms about naming Constellation Energy Group Inc. (CEG)’s Mayo Shattuck III executive chairman after the companies merge because it calculated the move would win it better terms for the acquisition, according to an internal company document.

Exelon Chairman and Chief Executive Officer John Rowe said in a Jan. 19 letter to the board that the company should “take some risk” by adding Shattuck, 57, the chairman and CEO of Baltimore-based Constellation, to its leadership team.

The letter, which was filed to Maryland regulators and obtained by Bloomberg News, was cited by Electricite de France SA (EDF) in its Dec. 5 objection to the $7.9 billion merger. EDF is the partner in Constellation’s five nuclear reactors.

Writing to the board of Chicago-based Exelon more than three months before the deal was announced, Rowe recommended Shattuck to the position while observing he was “controversial, both in Maryland and in the industry,” and “more of an investment banker than a utility executive.” The letter, an exhibit in the state’s review of the merger, was originally stamped “Confidential - Attorneys Eyes Only.”

Giving the executive chairman position to Constellation “inevitably will result in both a higher probability of completing a transaction and more favorable financial terms for Exelon shareholders,” Rowe wrote.

‘The Clear Message’

He cited two recent utility mergers to support his case, noting that Duke Energy Corp. (DUK) paid a 6 percent premium to acquire Progress Energy Inc. (PGN) after agreeing to allow Progress’s CEO to run the combined company. FirstEnergy Corp. (FE) offered “no such top position” when buying Allegheny Energy Inc. and paid a premium of about 32 percent, Rowe wrote.

“The clear message is that the risk of taking on Mr. Shattuck is worthwhile, given Exelon’s control of the board and that it would mean paying a lower premium to Constellation shareholders,” EDF said in its Dec. 5 filing.

An Exelon spokesman declined to comment on the letter.

“EDF is going to be unharmed by the merger,” Paul Elsberg, an Exelon spokesman, said in a telephone interview yesterday. The transaction will bring “significant benefits” to customers of Baltimore’s utility, to the Maryland economy and to both companies’ shareholders, he said.

Exelon’s $38.59-a-share all-stock bid to buy Constellation was a 12.5 percent premium based on closing prices on April 27, the day before the deal was announced. The offer is now worth about $40.56 a share, based on yesterday’s closing price.

Maryland Opposition

Institutional Shareholder Services, the investor advisory company, cited its approval of the premium in a Nov. 2 report urging Constellation holders to support the merger.

The transaction has been approved by regulators in Texas. It’s facing more obstacles in Maryland, where it’s opposed by Governor Martin O’Malley, consumer advocates, organized labor and EDF, the second-largest Constellation shareholder, according to Bloomberg data.

Chris Crane, the president of Exelon, will take over as CEO of the combined companies. Rowe, who will retire once the takeover is complete, wrote in the letter that Exelon directors would “maintain clear control” over the company’s management and operations, accounting for 80 percent of the board compared with Constellation’s 20 percent.

Shattuck’s role in the merged company, as well as his ability to advocate for Constellation’s Baltimore Gas & Electric utility, were criticized in EDF’s Dec. 5 filing.

Deutsche Bank Executive

Shattuck, who has headed Constellation since Nov. 1, 2001, has a background in investment banking and was chairman of Deutsche Bank AG’s Alex. Brown unit before joining the power company. Shattuck failed in two prior attempts to sell Constellation, first to NextEra Energy Inc. and then to Warren Buffett’s Berkshire Hathaway Inc.

The proposed executive chairman of the merged company agreed to testify about the transaction during an 11-day hearing conducted last month by the Maryland Public Service Commission after the state of Maryland and Maryland Energy Administration asked regulators to subpoena him.

Shattuck and Crane addressed leadership and other issues raised by EDF in their testimony to the commission, Lawrence McDonnell, a Constellation spokesman, said.

“There is an extensive public record on this,” McDonnell said yesterday in a telephone interview. “We are standing behind the accuracy of our testimony.”

Regina Davis, a spokeswoman for the Maryland commission, declined to comment about the letter.

Potential Merger Partners

Exelon had looked at “every regulated utility as a possible merger partner,” including Progress Energy, Rowe said in the letter. Regulated utilities, whose returns on equity are guaranteed by state commissioners, are seen as more desirable by investors.

The company concluded such a transaction would be “simply too expensive,” Rowe said.

“No transaction is strategically or financially perfect, but Constellation could fit nicely in a number of ways,” Rowe wrote to his board. Constellation adds a regulated income stream through its Baltimore utility, and would help Exelon through earnings “challenges” in 2012 and 2013, Rowe said.

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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