Constellation Energy Corporation (NYSE: CEG) has been a monster performer with a gain of more than 100% in the last year. The driving force has been its ownership and operation of nuclear power plants and other power generation assets. These are fueling the explosive growth of AI-data centers and their endless power consumption needs.
News is out that Constellation is nearing a deal to acquire the private equity-backed Calpine for roughly $30 billion including the assumption of debt. Calpine has reportedly been considering a sale for some time, and the rise of Constellation and others may make the sellers more eager to make a move. That said, merger discussions often fall apart and there are no assurances that any merger will be consummated.
It should be no surprise that Constellation Energy’s stock is down on the news. Perhaps the only surprise is that the stock isn’t down more than 4%. After rising over 100% and now having a $76 billion market cap, the first issue that should come to mind is that Constellation simply may not be able to meet its growing power demand trends all on its own.
Constellation’s huge clean power supply deal for Microsoft Corporation (NASDAQ: MSFT) via a Three-Mile Island reactor is a 20-year deal that reportedly came with above-market price guarantees so that Microsoft can deliver on its zero emissions goals.
Constellation also signed two supply agreements with the federal government worth more than $1 billion in recent days. Constellation is set to supply more than a dozen government departments spread over 5 states with nuclear power; and that power is expected to come from existing facilities and also from investments that it will make to boost its own production capacity.
Is Constellation running too close to full capacity? Going out on a limb to spend billions to acquire power, perhaps at what may be perceived as “at any cost,” may signal that the demand trends investors have been banking on are real and then some.
Calpine’s 2017 go-private acquisition involved three groups making the acquisition for $17 billion, which was $5.6 billion for its common shares and the rest was the assumption of Calpine’s debt.
If a Calpine deal is consummated, it would be the biggest power industry merger in nearly two decades. The size of this merger, which would include the assumption of Calpine debt in that $30 billion price tag, may indicate that Constellation is willing to do what it can as fast as it can to meet demand expectations.
Where the deal would get a bit tricky is that Calpine is considered an independent power producer that sells electricity at market prices rather than at regulated prices. While this allows greater profits in instances of demand spikes from extreme weather or rival outages, it also exposes the profits to the electric market swings. Calpine sells power to businesses and industrial sites, and also to residential neighborhoods.
What would be interesting here is the overall fit that a Calpine deal would give Constellation. Calpine operates 78 facilities spread over 22 U.S. states and Canada according to its latest data. Constellation’s geographical segments include the Mid-Atlantic, Midwest, New York, Texas/ERCOT, and it has other locations as well.
Calpine shows that it has a generating capacity of more than 27,000 megawatts, and that fleet can power approximately 27 million homes with clean and reliable energy. Calpine’s service map shows its highest concentrations are in California, Texas, and the Mid-Atlantic and Northeast.
Constellation’s coverage map is more spread out over 48 states and the addition of Calpine would greatly increase its footprint in California, Texas and in the Northeast. It claims to have 32,400 megawatts of capacity from nuclear, wind, solar, natural gas and hydro. Its claims are said to power 16 million homes and businesses.
There are of course no assurances that any merger will be consummated. And how the deal would be done, with a combination of cash and debt and perhaps some stock in the mix, would also determine how Wall Street and investors may treat the valuation going forward.
