PHILADELPHIA Texas power company TXU Corp. TXU.N said on Monday it agreed to be acquired by a group led by private equity firms Kohlberg Kravis Roberts & Co. KKR.UL and Texas Pacific Group TPG.UL for $31.8 billion in the largest leveraged buyout in history.
The investor group will pay $69.25 per share for TXU, a 15.4 percent premium over TXU's closing stock price of $60.02 on Friday. The previous leveraged buyout record was the $25.1 billion takeover of RJR Nabisco, also by KKR, announced in 1988.
While the company said the deal does not require state regulatory approval, one investor said the state agency would be closely watching the deal. Regulators in Maryland and New Jersey sidelined two large power sector deals last year.
"Somewhere down the road there's going to be a reckoning with the regulators. The regulators will look at that kind of leverage with fairly unsympathetic eyes," said John Olson, who runs hedge funds for Houston Energy Partners.
Shares of TXU added $7.91, or 13.2 percent, to $67.93 in afternoon trading on the New York Stock Exchange. TXU was the second-most active issue on the NYSE.
Power generators are drawing renewed takeover interest as electricity demand in many parts of the country is expected to outstrip generation capacity in the coming years, pushing power prices higher.
Those bullish fundamentals have also boosted the value of power plants, many of which were nearly worthless in the severe market downturn of 2001-2002 when dozens of new plants came on line.
Including debt, the TXU deal is valued at $43.8 billion, according to research firm Dealogic.
The buyout firms are paying 8.5 times EBITDA (earnings before interest, tax, depreciation and amortization) for TXU, compared with an average for the utilities industry of 7.9 times EBITDA, TXU said. That is below the more than 11 times EBITDA that investors agreed to pay for Houston-based pipeline company Kinder Morgan Inc. (KMI.N) last year.
The 15.4-percent premium being paid compares with the 13-percent premium that power company Duke Energy Corp. (DUK.N) had offered for Cinergy Corp. in 2005. That deal, worth about $9 billion, was completed last year.
In addition to KKR and Texas Pacific Group, equity investors in the company will be GS Capital Partners, Lehman Brothers Holdings Inc. LEH.N, Citigroup (C.N), and Morgan Stanley (MS.N), TXU said.
The deal marks a return to Texas for the buyout firms after unsuccessful efforts to buy utilities, attractive because of their steady cash flow, in other states.
KKR tried to buy Unisource in Arizona and Texas Pacific wanted Portland General in Oregon, but those deals were blocked by state regulators.
Texas Pacific and KKR were part of a consortium that bought Texas Genco, then the second-biggest power generating company in the state, for $3.7 billion in 2004. The consortium later sold Texas Genco to NRG Energy for about $5.8 billion in February 2006.
TURNING OVER A GREEN LEAF?
TXU has been battling environmentalists and others who have been trying to prevent the company from more than doubling its fleet of coal-fired power plants in Texas.
TXU and its new buyers made several pledges to improve the company's environmental policies, including not building most of the planned coal plants. The acquisition won the blessing of the Environmental Defense Fund and Natural Resources Defense Council.
Under the agreement, TXU said it would cut the number of planned coal-fueled generation plants to 3 from 11, and implement 10 percent price cuts that would result in annual savings of about $250 a year for the average household.
It was a "very smart move on their part to have talked in advance with environmental groups," said Barry Abramson, a utility analyst with Gabelli Asset Management Inc., which owns shares of TXU.
TXU said the plan to scale back coal-plant expansion would prevent 56 million tons of annual carbon emissions. The company said it would also invest $400 million in conservation and energy efficiency activities over the next five years.
Although the plans won praise from some environmental groups, other environmental advocates said the moves failed to prove that TXU had turned over a new, greener leaf.
Michael Brune, executive director of Rainforest Action Network said, "As far as TXU goes, we think they haven't gone far enough. If you are really serious about climate change, you would not consider building new coal plants."
Coal-fired power plants are among the nation's largest emitters of carbon dioxide, the main gas most scientists blame for contributing to global warming.
"The war is far from over," Tom Smith, director of the Texas office of advocacy group Public Citizen, told reporters on a conference call.
Shares of energy-services company McDermott International Inc. (MDR.N) fell more than 5 percent on concerns that it may lose a big chunk of business due to TXU's plans to cut the number of coal-fueled power plants. Last year, McDermott's Babcock & Wilcox unit won a contract to provide coal-fired boilers and other equipment for TXU.
SHOPPING FOR OTHER BIDS
TXU may solicit proposals from other parties through April 16. If it accepts a higher offer during that time, it must pay a breakup fee of $375 million. If it accepts a higher bid after April 16, it must pay a $1 billion breakup fee, or about 3.14 percent.
TXU said last year it considered an asset swap with rival Exelon Corp. (EXC.N) and also weighed splitting up its regulated electric delivery business and its unregulated power business.
TXU said members of management, including Chairman and Chief Executive John Wilder, have made no commitments to stay with the company should the planned takeover go through.
That would leave management open in case a superior offer emerged, Wilder said during a conference call with analysts and reporters.
Since Wilder became CEO of TXU in 2004, he helped the utility cut costs, reduce debt, and sell assets in Texas and Australia. Under his tenure, TXU's stock has risen from $27.
One TXU shareholder said the bidders had clearly worked hard to structure the deal to overcome any regulatory hurdles or shareholder objections, which would help scare off rival suitors from trying to bid for TXU.
"There are enough political land mines in this thing that I would doubt" there would be a rival bid, said James Halloran, an analyst with National City Private Client Group, which owns 15,000 shares of TXU. "And I can't see any shareholder revolt on this."
The deal does not need approval from the Public Utility Commission of Texas, TXU said, but needs the support of the state legislature.
But there are some signs the deal may end up meeting some resistance with Texas politicians, who have been fighting TXU over its rates and coal plant plans.
"I'm not in favor of it; it's not in the best interests of Texans," said Texas Rep. Sylvester Turner of Houston, who added that Texas legislators should stop the deal.
The deal, which faces a 6 to 9 month approval process with the Nuclear Regulatory Commission, is expected to close in the second half of 2007.
Credit Suisse Securities and Lazard acted as financial advisers to TXU. Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley acted as financial advisers to the investor group.