Thursday, September 18, 2008

Constellation Energy (NYSE:CEG): Downgraded to Hold at Citi

- Citigroup's Greg Gordon deals a blow to Constellation Energy (NYSE:CEG) today after the co confirmed that its firm, underwritten $2Bn credit facility commitment announced on 8/27 remains in effect. However, S&P placed the company on CreditWatch, essentially giving CEG an ultimatum to raise $750mm-$1bn of cash through equity or asset sales, or sell the company outright. Absent action in the short term, S&P would lower CEG’s rating to subinvestment grade, which would put CEG out of business given the collateral requirements and lack of willing trading counterparties that would result.

What's Next — CEG has retained Morgan Stanley and UBS to evaluate strategic alternatives. CEG is in active discussions with potential strategic partners. The company is for sale either in part or in whole. Options range from issuing equity or convertible equity, selling off the more liquid positions in the trading book, selling merchant assets, or finding a merger partner for the entire company. They think CEG will choose its course of action in the next week or face the above-mentioned credit rating downgrade.

Conclusions — Firm's Buy rating was contingent on several factors, including CEG's navigating the ratings review process, avoiding a material ratings downgrade. CEG will now have to move to get the best deal available in a limited time frame, like Merrill Lynch did with BofA. They believe CEG’s assets are worth $50/share, but given the circumstances the company may dilute shareholders below our valuation, be sold at a discount to intrinsic value or not reach a deal at all. The firm is therefore lowering their rating from Buy to Hold with a $40 target.

Notablecalls: Well, Greg your clients must be thrilled. You downgrade the stock after sticking to your $95 tgt and Buy rating all the way down.

The best part?

Remember how CEG got murdered on Tuesday? The slide from $47 to $13 intraday. Greg wasn't in to answer customer inquiries. Gotta love it. Wonder how long you will be able to hold on to your job at Citi, really.

There is no question in my mind this downgrade will hurt the stock once more. The credit agencies have the power to put CEG out of business.

1 comment:

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