Constellation is buying Calpine in one of the largest energy deals ever.
Constellation Energy (NASDAQ:CEG) stock was moving on Friday, rising some 25% after the energy company announced that it is acquiring Calpine Corp., a leading natural gas energy company.
The Baltimore-based company is the largest provider of clean energy in the country, with about 90% of its energy carbon-free from hydro, wind, solar, and nuclear generation.
The acquisition brings Calpine, one of the largest generators of electricity from natural gas and geothermal sources in the country, into the fold. The combination creates what is believed to be the largest provider of clean and low-emission energy in the country.
The $16.4 billion deal is one of the largest energy sector acquisitions ever. It includes $4.5 billion in cash, 50 million shares of Constellation stock, and $12.7 billion of Calpine debt. The value increases to $26.6 billion when factoring in the cash Calpine will generate before the closing date and the value of tax attributes.
“By combining Constellation’s unmatched expertise in zero-emission nuclear energy with Calpine’s industry-leading, best-in-class, low-carbon natural gas and geothermal generation fleets, we will be able to offer the broadest array of energy products and services available in the industry. Both companies have been at the forefront of America’s transition to cleaner, more reliable and secure energy, and those shared values will guide us as we pursue investments in new and existing clean technologies to meet rising demand,” Joe Dominguez, president and CEO of Constellation, said.
20% accretive to earnings
Since Constellation spun off of Exelon in 2022, it has been a juggernaut. The stock has posted returns of 54%, 37%, and 93% in each of the past three years. It has a three-year annualized return of 94%, making it among the top performers over that time.
The stock price jumped another 25% on Friday to about $306 per share. It is up 35% year-to-date as of January 10 and has returned 163% over the past 12 months.
The acquisition, upon closing within 12 months, is expected to be immediately accretive to earnings. The company projects adjusted operating earnings per share (EPS) accretion of more than 20% in 2026 with at least $2 per share of EPS accretion in future years.
In addition, it is anticipated to produce more than $2 billion of free cash flow annually, creating capital and scale to reinvest in the business.
Further, Constellation’s earnings outlook is projected to grow at a double-digit pace through the end of the decade, spurred by this strategic acquisition.
“Together, we will be better positioned to bring accelerated investment in everything from zero-emission nuclear to battery storage that will power our economy in a way that puts people and our environment first,” Andrew Novotny, president and CEO of Calpine, said.
Nuclear leader
Most of Constellation’s energy comes from nuclear generation, as it is the largest operator of nuclear plants in the U.S. Just last week, it inked a $1 billion deal with the U.S. government to deliver nuclear energy to 13 federal agencies over the next decade.
Market analysts were largely bullish on the deal.
“We see the generation fleets as complementary and owning generation as credit favorable in the short-to-medium term,” Aneesh Prabhu, power and LNG infrastructure managing director at S&P Global Ratings, said. “It will become the largest independent power producer (IPP) in North America and own over 60 GW of generation capacity. Overall, the transaction creates the largest coast-to-coast power generator,”
Also, analysts at Bank of America and UBS sees the deal as immediately and meaningful accretive to earnings.
However, Enverus Intelligence Research Analyst Scott Wilmot said it does raise Constellation’s risk profile.
“The Calpine portfolio, which is predominantly gas, carries significantly higher commodity risk,” Wilmot said, reported Investors Business Daily. “While the acquisition price appears fair, the shift in CEG’s risk profile could lead to a higher risk premium being priced in, potentially putting downward pressure on its stock.”
Constellation has a median price target of $290 per share, which is down about 5% from the current price. Further, it has a P/E ratio of 26.
